GIFT  OF 


J  . 


INVESTIGATION 


OF  THE 


PEOPLES   GAS   LIGHT   &   COKE 
COMPANY 

FOR  THE  CHICAGO  COUNCIL  COMMITTEE  ON 

GAS,  OIL  AND  ELECTRIC  LIGHT 


SUBMITTED  TO  THE  GAS  SUBCOMMITTEE 
CONSISTING  OF 

Alderman  WILLIAM  J.  PRINGLE,  Chairman 
Alderman   THEODORE    K.   LONG 
Alderman  CHARLES  E.  MERRIAM 


BY 

WILLIAM  J.  HAGENAH 

In  Charge  of  Gas  Investigation 


THE  HENRY  O.  SHEPARD  CO.,  PR' 
1911 


INVESTIGATION 


OF  THE 


PEOPLES    GAS   LIGHT   &   COKE 
COMPANY 

FOR  THE  CHICAGO  COUNCIL  COMMITTEE  ON 

GAS,  OIL  AND  ELECTRIC  LIGHT 


SUBMITTED  TO  THE  GAS  SUBCOMMITTEE 
CONSISTING  OF 

Alderman  WILLIAM  J.   PRINGLE,  Chairman 
Alderman    THEODORE    K.   LONG 
Alderman  CHARLES  E.  MERRIAM 


BY 

WILLIAM  J.  HAGENAH 

In  Charge  of  Gas  Investigation 


THE  HEXRV  0.  SHEPARD  CO.,   PRINTERS,  CHICAGO. 
1911 


COMMITTEE   ON 

GAS,  OIL  AND  ELECTRIC  LIGHT 

OF   THE    CITY    COUNCIL   OP  THE   CITY    OF    CHICAGO. 

ALD.  WILLIAM  J.  PRINGLE,  Chairman, 

ALD.  JOHN  S.  DERPA,  ALD.  CHARLES  E.  MERRIAM, 

ALD.  ALBERT  "W.  BEILFUSS,  ALD.  CHAS.  TWIGG, 

ALD.  LEWIS  D.  SITTS,  ALD.  THEODORE  K.  LONG, 

ALD.  JOHN  P.  STEWART,  ALD.  JACOB  A.  HEY, 

ALD.  PETER  EEINBERG,  ALD.  JAMES  B.  BOWLER, 

ALD.  ANTON  J.  CEBMA^,  •    • :  :  -:4LP-  JAMES  M.  DAILEY. 


CHICAGO,  April  17,  1911. 

To  the  Gas  Subcommittee,  Council  Committee  on  Gas,  Oil  and  Electric 
Light,  Honorable  William  J.  Pringle,  Chairman,  Chicago: 

DEAR  SIRS, —  Pursuant  to  your  instructions,  an  investigation  has  been 
made  of  the  books,  accounts  and  records  of  The  Peoples  Gas  Light  &  Coke 
Company  of  this  city  in  order  to  ascertain  the  reasonableness  of  the  pres- 
ent net  rate  of  85  cents  per  thousand  cubic  feet  for  manufactured  gas. 
The  results  of  such  investigation,  together  with  the  conclusions  arrived 
at,  are  herewith  submitted.  As  desired  by  your  committee,  the  rate  recom- 
mended for  substitution  in  place  of  the  present  charge  is  a  uniform  rate 
for  all  purposes,  regardless  of  the  amount  consumed. 

In  this  connection,  I  beg  to  express  my  gratitude  for  the  generous 
assistance  which  I  have  received  from  those  associated  with  me  in  various 
capacities  in  the  work  of  this  investigation.  Their  loyalty  is  greatly 
appreciated.  I  feel  especially  indebted  to  Mr.  W.  J.  Huddle  for  his 
valuable  services  in  an  engineering  capacity,  for  which  he  deserves  great 

credit. 

Very  respectfully  yours, 

WILLIAM  J.  HAGENAH, 
In  charge  Gas  Investigation. 


264321 


INVESTIGATION 

OF  THE 

PEOPLES  GAS  LIGHT  &  COKE  COMPANY 


FOR  THE 


Council  Committee  on  Gas,  Oil  and  Electric  Light 
CHICAGO. 


HISTORICAL. 

The  Peoples  Gas  Light  &  Coke  Company  is  an  Illinois  corporation 
located  in  the  city  of  Chicago,  incorporated  under  a  special  act  of  the 
legislature  approved  February  12,  1855,  and  operating  under  a  perpetual 
charter  with  full  power  and  authority  to  manufacture,  distribute  and  sell 
gas  for  the  purpose  of  lighting  the  city  of  Chicago,  the  streets,  buildings 
and  public  places  therein,  and  to  this  end  to  erect  all  necessary  buildings, 
apparatus  and  facilities.  The  charter  of  the  company  provided  that  the 
consent  of  the  city  of  Chicago  should  be  secured  to  the  laying  of  the  mains, 
which  consent  was  obtained  by  ordinance  passed  in  August,  1858.  The 
company  as  organized  at  present  is  a  consolidation  made  pursuant  to  an 
act  of  the  legislature  under  date  of  August,  1897,  when  seven  independent 
and  more  or  less  competitive  companies  were  merged.  The  companies 
embraced  in  the  combination  were  the  Peoples  Gas  Light  &  Coke  Com- 
pany, the  Chicago  Gas  Light  &  Coke  Company,  the  Consumers  Gas  Com- 
pany, the  Equitable  Gas  Light  &  Fuel  Company,  the  Suburban  Gas  Com- 
pany, the  Lake  Gas  Company,  the  Illinois  Light,  Heat  &  Power  Company 
and  the  Chicago  Economic  Fuel  Gas  Company.  Since  1897  the  company 
has  extended  its  sphere  and  obtained  complete  control  of  the  gas  business 
in  the  city  of  Chicago  by  absorbing  several  minor  plants  and  the  leasing 
of  others. 

The  history  of  the  company  has  been  marked  by  much  strife  and  litiga- 
tion, in  which  the  City  Council  of  Chicago  and  the  Legislature  of  the 
State  have  played  a  prominent  part.  Because  of  the  importance  of  the 
conditions  under  which  the  property  was  developed,  as  reflected  in  the 
financial  position  of  the  company,  and  the  necessarily  frequent  reference 
to  some  of  these  conditions  because  of  their  bearing  on  the  present  cost  of 


6 

gas,  a  brief  outlin.'  <>;'  the  ;i,<-rv  important  steps  in  the  development  of  the 
consolidation  is  presented. 

In  February,  1849,  there  was  incorporated  by  special  act  of  the  State 
Legislature  the  Chicago  Gas  Light  &  Coke  Company  with  the  exclusive 
right  to  manufacture,  distribute  and  sell  gas  in  the  city  of  Chicago  for  a 
period  of  ten  years.  There  was  no  requirement  that  the  consent  of  the  city 
should  be  obtained  before  entering  upon  its  charter  rights. 

The  Consumers  Gas  Fuel  &  Light  Company  of  Chicago  was  incorpo- 
rated in  January,  1882,  and  on  April  28,  1882,  the  Common  Council  of 
that  city  granted  to  the  company  the  right  to  construct,  maintain  and 
operate  gasworks  within  such  city,  together  with  the  right  to  lay  mains, 
feeders  and  pipes  in  all  avenues,  streets,  alleys  and  public  buildings  in  the 
city  for  lighting  and  fuel  purposes.  The  same  ordinance  prescribed  a 
lighting  standard  of  sixteen  candles  and  fixed  the  price  of  gas  at  $1.7'5 
per  thousand  cubic  feet,  with  a  discount  of  75  cents  per  thousand  cubic 
feet  to  customers  using  100,000  cubic  feet  per  annum.  The  operations  of 
this  company  were -restricted  to  the  city  of  Chicago. 

This  company  was  unfortunate  and  in  May,  1886,  all  of  its  property 
was  sold  under  a  decree  of  the  United  States  Court  on  foreclosure  of  the 
mortgage  given  by  it,  and  in  November,  1886,  the  Consumers  Gas  Com- 
pany was  formed  with  a  capital  stock  of  $5,000,000,  which  company 
acquired  all  the  property,  rights,  privileges  and  franchises  previously 
owned  by  the  Consumers  Gas  Fuel  &  Light  Company,  but  sold  through 
court  proceedings. 

The  Suburban  Gas  Company  was  formed  in  1884  with  authority  to 
manufacture,  distribute  and  sell  gas  within  the  limits  of  Cook  County. 
Soon  after  its  incorporation  the  village  of  Lake  View,  now  a  part  of  the 
city  of  Chicago  by  annexation,  granted  an  ordinance  to  this  company 
authorizing  it  to  lay  mains  and  service  pipes  in  the  public  streets,  alleys, 
avenues,  highways  or  grounds  within  the  limits  of  said  town,  prescribing 
a  lighting  quality  of  sixteen  candles,  and  fixed  the  price  of  gas  for  public 
lighting  at  $1.50  per  thousand  cubic  feet  and  for  commercial  consumption 
at  $2.00  per  thousand  cubic  feet,  with  a  prompt  payment  discount  of  50 
cents  per  thousand  cubic  feet.  This  company  has  always  been  controlled 
by  the  Chicago  Gas  Light  &  Coke  Company,  referred  to  above. 

The  Equitable  Gas  Light  &  Fuel  Company  was  organized  in  August, 
1886,  with  a  capital  stock  of  $3,000,000.  This  company  secured  an  ordi- 
nance from  the  city  of  Chicago  granting  to  it  the  usual  authority  for  the 
occupancy  of  the  streets  and  highways  with  its  mains,  services  and  feed- 
ers, and  fixed  the  lighting  standard  at  sixteen  candles  and  the  rate  at  $1.75 
per  thousand  cubic  feet,  with  a  discount  of  25  cents  per  thousand  cubic 
feet. 

The  Hyde  Park  Gas  Company,  with  a  capital  stock  of  $300,000,  was 
incorporated  under  the  general  incorporation  act  of  the  State  of  Illinois 


in  May,  1871,  with  the  power  to  manufacture,  distribute  and  sell  gas  in 
the  town  of  Hyde  Park,  a  municipality  adjoining  the  city  of  Chicago,  but 
since  by  annexation  made  a  part  of  it.  By  ordinance  in  1871,  the  com- 
pany was  granted  permission  to  lay  its  mains,  pipes,  feeders  and  services 
in  any  and  all  of  the  streets,  alleys,  avenues,  highways,  parks,  squares  and 
public  grounds  throughout  said  town  north  of  the  center  line  of  Sixty- 
seventh  street.  This  permission  was  made  exclusive  north  of  the  center 
line  of  Sixtieth  Street  for  a  period  of  fifteen  years.  The  town  of  Hyde 
Park  was  given  the  right  to  purchase  the  plant  within  a  period  of  fifteen 
years  and  a  method  was  provided  for  valuing  the  property  in  case  of  sale 
to  the  municipality.  This  latter  provision  was  subsequently  repealed  and 
the  territory  of  the  company  was  enlarged  by  ordinance  in  1885  so  as  to 
embrace  the  section  south  of  Sixty-seventh  Street.  The  Hyde  Park  Gas 
Company  was  controlled  by  the  Consumers  Gas  Company. 

In  November,  1885,  the  Illinois  Light,  Heat  &  Power  Company  was 
formed  under  the  general  incorporation  laws  of  the  State  to  engage  in 
the  manufacture  of  gas.  The  capital  stock  of  this  company  was  $600,000. 
This  company  never  received  a  grant  of  authority  from  the  city  of  Chi- 
cago, but  sold  all  of  its  product  directly  to  the  Peoples  Gas  Light  &  Coke 
Company. 

The  Lake  Gas  Company  was  organized  in  July,  1881,  under  the  general 
incorporation  laws  of  the  State  of  Illinois  for  the  purpose  of  manufactur- 
ing, distributing  and  selling  gas  in  the  town  of  Lake,  a  municipality 
adjoining  the  city  of  Chicago,  but  since  made  a  part  of  that  city  by  annexa- 
tion. This  company  was  incorporated  with  a  capital  stock  of  $800,000.  It 
never  directly  acquired  authority  to  operate  in  the  town  of  Lake,  but 
secured  such  authority  through  an  ordinance  granted  by  that  town  to  the 
Northwestern  Gas  Works  Company,  a  New  York  corporation  authorized 
to  furnish  illuminating  gas  for  a  period  of  twenty-five  years  and  to  occupy 
for  this  purpose  the  necessary  streets,  alleys,  avenues,  highways  and 
public  grounds  in  the  town  of  Lake.  This  ordinance  fixed  the  price  of  gas 
for  private  consumption  at  a  price  not  to  exceed  $2.50  for  the  equivalent 
in  an  illuminating  power  or  value  of  one  thousand  cubic  feet  of  coal  gas 
of  fourteen  candle  power.  The  company  was  given  the  exclusive  privilege 
to  light  the  streets,  highways,  public  grounds  and  buildings  of  the  town. 
It  was  controlled  by  the  Consumers  Gas  Company. 

The  Chicago  Economic  Fuel  Gas  Company  was  incorporated  in  Decem- 
ber, 1889,  under  the  general  incorporation  act  of  the  State.  The  capital 
stock  was  $1,000,000.  On  December  22, 1890,  the  City  Council  of  Chicago 
granted  to  this  company  the  right  to  construct  and  operate  works  for  the 
manufacture  of  fuel  gas  only  within  the  city  and  also  the  right  to  lay 
mains,  pipes  and  feeders  in  all  the  streets,  avenues,  alleys  and  public 
places  of  the  city  for  the  distribution  of  natural  and  manufactured  fuel 
gas  exclusively.  The  privileges  conferred  by  this  ordinance  were  for  the 


8 

term  of  twenty-five  years,  with  the  permission  reserved  to  the  city  to  pur- 
chase the  plant  at  an  appraised  value  at  any  time  before  the  expiration  of 
twenty  years.  The  appraisal,  it  was  provided,  should  contain  no  allow- 
ance for  rights,  privileges  and  franchises  granted  by  the  city. 

This  ordinance  specified  that  the  company  should  charge  rates  not  to 
exceed  60  cents  per  thousand  cubic  feet  for  natural  gas,  nor  to  exceed  50 
cents  per  thousand  cubic  feet  for  manufactured  gas,  with  a  prompt  pay- 
ment discount  of  10  cents  per  thousand  cubic  feet.  It  was  also  provided 
that  the  company  should  pay  annually  to  the  city  of  Chicago  in  consid- 
eration of  the  privileges  granted  an  amount  equal  to  five  per  cent  on  the 
gross  receipts  of  the  company,  and  in  addition  to  the  above  provisions  the 
company  was  prohibited  from  at  any  time  entering  into  any  combination, 
directly  or  indirectly,  with  any  gas  company  concerning  rates  to  be 
charged  for  gas,  and  any  violation  of  this  provision  should  work  a  forfeit 
of  this  grant. 

The  above  ordinance  was  subjected  to  frequent  amendment.  One  week 
after  the  original  grant  the  act  was  amended  by  depriving  the  city  of  the 
right  to  order  extensions  and  also  depriving  it  of  the  right  to  purchase  the 
the  plant.  In  July,  1891,  the  act  was  again  amended  by  authorizing  the 
company  to  construct  and  operate  works  for  the  manufacture  of  illumi- 
nating and  fuel  gas  within  the  city  and  to  construct  mains  and  feeders 
in  the  public  streets,  avenues  and  highways  for  the  distribution  of  illumi- 
nating and  manufactured  fuel  gas.  A  new  schedule  of  rates  was  provided 
fixing  the  charge  for  illuminating  gas  at  $1.10  per  thousand  cubic  feet, 
for  natural  gas  60  cents  per  thousand  cubic  feet,  and  for  manufactured 
fuel  gas  50  cents  per  thousand  cubic  feet,  with  a  prompt  payment  dis- 
count of  10  cents  per  thousand  cubic  feet  in  each  case. 

The  same  amendment  provided  for  the  compensation  to  the  city  at  the 
rate  of  5  per  cent  on  the  gross  earnings  from  the  sale  of  natural  gas  and 
manufactured  fuel  gas  and  at  the  rate  of  3  per  cent  on  the  gross  earnings 
from  the  sale  of  illuminating  gas. 

In  1891  the  company  entered  into  a  contract  with  the  Indiana  Natural 
Gas  &  Oil  Company  whereby  the  latter  company  was  to  furnish  natural 
or  manufactured  fuel  gas  to  the  Chicago  Economic  Fuel  Gas  Company, 
which  product  this  company  was  to  distribute  through  its  pipes  and  mains 
in  the  city  of  Chicago.  Under  this  contract  the  Indiana  Natural  Gas  & 
Oil  Company  pumped  its  product  to  the  State  line,  where  it  was  delivered 
to  the  Chicago  Economic  Fuel  Gas  Company,  an  arrangement  which  is 
still  in  effect.  This  plant  continued  its  individual  existence  until  it  was 
merged  with  the  Peoples  Gas  Light  &  Coke  Company  in  1897,  since 
which  date  the  consolidated  company  has  continued  to  distribute  natural 
gas  to  the  consumers  in  Chicago  at  the  rate  specified  in  the  amended  ordi- 
nance granting  the  right  to  the  Chicago  Economic  Fuel  Gas  Company. 
This  company  is  discussed  at  greater  length  in  another  part  of  this  report. 


9 

The  Mutual  Fuel  Gas  Company  was  incorporated  in  April,  1889, 
under  the  general  incorporation  laws  of  the  State.  It  had  an  authorized 
capital  stock  of  $5,000,000,  of  which  $1,500,000  was  issued.  This  company 
succeeded  to  the  grant  of  authority  which  the  village  of  Hyde  Park  made 
under  date  of  March  21,  1889,  to  Messrs.  Hank  &  McClary.  This  firm  was 
authorized  to  construct  and  operate  a  system  of  works  for  the  furnishing 
of  natural  and  manufactured  gas  and  petroleum  oil,  and  for  this  purpose 
it  was  empowered  to  pipe  the  streets,  avenues  and  other  public  places  with 
its  mains,  feeders  and  tubes.  The  ordinance  provided  that  gas  should  be 
sold  at  the  rate  of  $1.25  per  thousand  cubic  feet  for  illuminating  purposes, 
and  90  cents  per  thousand  cubic  feet  for  heating  purposes,  with  a  20  per 
cent  prompt  payment  discount.  The  lighting  quality  of  the  gas  was  fixed 
at  sixteen  candles. 

In  April,  1887,  the  Chicago  Gas  Trust  Company  was  formed  with  a 
capital  stock  of  $25,000,000,  consisting  of  250,000  shares  of  the  par  value 
of  $100  each,  all  of  which  was  issued.  This  company  acquired  a  majority 
interest  in  the  shares  of  the  capital  stock  of  the  Chicago  Gas  Light  &  Coke 
Company,  the  Peoples  Gas  Light  &  Coke  Company,  the  Equitable  Gas 
Light  &  Fuel  Company  and  the  Consumers  Gas  Company.  By  reason  of 
the  ownership  of  these  shares  the  Chicago  Gas  Trust  Company  also  con- 
trolled the  Suburban  Gas  Company,  the  Hyde  Park  Gas  Company,  the 
Lake  Gas  Company  and  the  Illinois  Light,  Heat  &  Power  Company. 

The  purpose  of  the  incorporation  of  the  Chicago  Gas  Trust  Company, 
as  expressed  in  its  articles  of  incorporation,  was  twofold:  first,  for  the 
purpose  of  erecting  and  operating  gas-works  for  the  manufacture  and 
sale  of  gas  in  Chicago  and  other  places  in  this  State ;  and  second,  to  pur- 
chase and  hold,  or  sell,  the  capital  stock,  or  purchase  or  lease  or  operate 
the  property,  plant,  good- will,  rights  and  franchises  of  any  gas-works  or 
gas  company  or  companies,  or  of  any  electrical  company  or  companies,  in 
Chicago  or  elsewhere,  etc.  The  company  sought  to  exercise  the  powers 
claimed  under  the  second  section  only  and  for  that  purpose  bought  a 
majority  of  the  shares  of  all  the  stock  of  the  four  companies  above  men- 
tioned whereby  it  might  have  the  control  of  all  the  gas  companies  in  the 
city  of  Chicago  and  thus  destroy  competition  and  monopolize  the  gas 
business. 

The  validity  of  the  organization  of  the  company  as  above  outlined  was 
attacked  by  the  Attorney-General  of  the  State  of  Illinois,  who  filed  an 
information  in  quo  warranto.  The  decision  of  the  court  in  this  proceeding 
was  rendered  in  November,  1889,  and  held  that  the  corporation  so  formed 
was  not  for  a  legal  purpose  and  tHat  all  acts  done  by  it  toward  the  accom- 
plishment of  such  object  was  illegal  and  void.  Prior  to  this  time,  in  1887, 
all  the  shares  of  the  capital  stock  of  the  four  main  companies  which  were 
held  through  stock  ownership  by  the  Chicago  Gas  Trust  Company  and 
which  shares  stood  in  its  name,  had  been  pledged  by  the  Chicago  Gas 


10 

Trust  Company  with  the  Fidelity  Insurance  Trust  &  Safe  Deposit  Com- 
pany of  Philadelphia  for  the  security  of  the  payment  of  the  bonds  then 
or  thereafter  issued  by  the  Chicago  Gas  Light  &  Coke  Company,  the 
Peoples  Gas  Light  &  Coke  Company,  the  Consumers  Company  and  the 
Equitable  Gas  Light  &  Fuel  Company. 

When  the  Supreme  Court  held  in  its  decision  of  November,  1889,  that 
the  acts  of  the  Chicago  Gas  Trust  Company  were  illegal  and  void,  thus 
practically  dissolving  the  corporation,  it  was  manifest  that  some  arrange- 
ment was  imperatively  necessary  with  respect  to  the  shares  of  the  capital 
stock  of  the  holding  company  then  outstanding  aggregating  $25,000,000, 
and  such  proceedings  were  thereupon  had  that  the  certificates  for  the 
shares  of  the  four  companies  controlled  in  the  name  of  the  Chicago  Gas 
Trust  Company  and  held  for  the  Fidelity  Insurance  Trust  &  Safe  Deposit 
Company  were  exchanged,  the  Fidelity  Company  surrendering  the  cer- 
tificates it  held  for  new  certificates  to  an  equivalent  amount  made  out  by 
the  four  principal  companies  for  the  number  of  shares  by  them  severally 
issued  to  the  Chicago  Gas  Trust  Company  in  the  name  of  the  Fidelity 
Insurance  Trust  &  Safe  Deposit  Company.  The  Fidelity  Company 
thereupon  issued  to  the  stockholders  of  the  Chicago  Gas  Trust  Company 
its  own  trust  certificates  against  the  shares  of  the  capital  stock  so  in  its 
name,  the  certificates  for  which  it  held.  The  total  amount  of  the  cer- 
tificates thus  issued  by  the  Fidelity  Insurance  Trust  &  Safe  Deposit  Com- 
pany was  $24,885,100.  The  Fidelity  certificates  recited  that  each  holder 
was  entitled  to  the  proportional  part  of  250,000  undivided  shares  in  and 
to  the  several  Chicago  gas  companies  deposited  with  the  Fidelity  Insur- 
ance Trust  &  Safe  Deposit  Company  under  the  several  deeds  of  trust. 
In  the  meantime  the  Chicago  Gas  Trust  changed  its  name  to  the  Chicago 
Gas  Company,  and  after  the  arrangement  for  the  protection  $f  the  stock- 
holders of  that  company  had  been  made  with  the  Fidelity  Insurance  Trust 
&  Safe  Deposit  Company,  as  indicated,  the  Chicago  Gas  Company,  for- 
merly the  Chicago  Gas  Trust  Company,  was  dissolved  according  to  law. 

The  situation  remained  in  this  condition  until  April,  1894,  when 
another  Attorney-General  of  the  State  of  Illinois  filed  a  bill  against  the 
Fidelity  Insurance  Trust  &  Safe  Deposit  Company,  setting  up  that  the 
arrangement  above  described  was  illegal  under  the  laws  of  the  State  of 
Illinois,  and  an  injunction  was  issued  by  the  circuit  court  of  Cook  county, 
restraining  the  payment  of  any  dividends  to  the  Fidelity  Insurance  Trust 
&  Safe  Deposit  Company.  This  step  again  necessitated  the  immediate 
reorganization  of  the  properties.  Thereupon  a  reorganization  committee 
was  formed  and  all  of  the  certificates  issued  by  the  Fidelity  Insurance 
Trust  &  Safe  Deposit  Company  of  Philadelphia  were  exchanged  for  cer- 
tificates of  the  Central  Trust  Company  of  New  York,  preliminary  to  such 
reorganization.  Thereafter  the  Legislature  of  Illinois  passed  an  act  gen- 
erally known  as  the  Gas  Consolidation  Act,  in  June,  1907',  which  provided 


11 

in  substance  (1)  that  all  gas  companies  now  organized,  or  hereafter  to  be 
organized,  were  authorized  to  sell,  transfer  and  lease  all  their  property, 
rights  and  franchises  to  any  other  gas  company  doing  business  in  the  same 
city;  (2)  that  any  gas  company  now  organized,  or  hereafter  to  be  organ- 
ized, doing  business  in  the  same  city,  could  consolidate  and  merge  into  a 
single  corporation  which  should  be  one  of  the  merging  or  consolidating 
companies;  and  (3)  that  all  companies  should  be  empowered  to  manu- 
facture and  distribute  gas  for  fuel  purposes  and  to  distribute  natural  gas. 

Pursuant  to  this  statute  a  consolidation  was  effected  of  the  seven  com- 
panies previously  mentioned.  The  legality  of  this  act  was  subsequently 
sustained  by  the  Supreme  Court  of  Illinois  in  the  action  by  the  State's 
Attorney  of  Cook  county  to  contest  its  validity  and  constitutionality.  In 
order  to  carry  out  and  make  possible  the  merger  under  the  above  act  it 
became  necessary  to  increase  the  capital  stock  of  the  Peoples  Gas  Light 
&  Coke  Company  from  $4,000,000  to  $25,000,000.  As  already  explained 
in  the  preceding  paragraphs,  there  were  outstanding  at  this  time  certifi- 
cates issued  by  the  Fidelity  Insurance  Trust  &  Safe  Deposit  Company 
which  were  listed  upon  the  stock  exchanges  of  the  countVy  aggregating 
$24,885,100.  There  were  also  outstanding  some  shares  of  the  capital  stock 
of  the  various  four  main  companies,  which  had  never  been  acquired  by 
the  Chicago  Gas  Trust  Company,  nor  brought  within  the  terms  of  the 
trusts  with  the  Fidelity  Insurance  Trust  &  Safe  Deposit  Company, 
amounting  to  $44,300,  and  the  difference  between  these  amounts  and  the 
$25,000,000  of  the  capital  stock  as  increased  was  turned  into  the  treasury 
of  the  Peoples  Gas  Light  &  Coke  Company. 

The  basis  of  exchange  of  the  stocks  of  the  four  principal  companies 
for  the  shares  of  the  Peoples  Gas  Light  &  Coke  Company  as  increased  was 
the  subject  of  active  and  long-continued  negotiation  among  the  several 
committees  representing  the  stockholders  of  the  various  companies  to  be 
merged  under  the  consolidation  act  and  the  reorganization  committee. 
The  sharess  of  some  of  the  companies  were  valued  considerably  higher 
than  those  of  others  and  the  final  settlement  was  made  upon  a  basis  pro- 
viding for  the  exchange  of  the  stock  of  the  various  competing  companies 
for  stock  of  the  Peoples  Gas  Light  &  Coke  Company,  according  to  the  esti- 
mated or  known  market  value  of  the  shares  of  each  company. 


The  bonds  of  the  consolidated  companies  were  all  assumed  by  the  new 
corporation,  which  was  authorized  to  issue  $40,000,000  of  5  per  cent 
refunding  bonds,  of  which  $29,046,000  was  reserved  to  retire  prior  lien 
bonds  of  the  constituent  companies  as  follows : 

First  Mortgage  6%  Bonds  of  The  Peoples  Gas  Light  &  Coke  Com- 
pany, dated  November  9,  1874,  and  due  November  1,  1904 $  2,100,000 

Second  Mortgage  6%  Bonds  of  The  Peoples  Gas  Light  &  Coke 

Company,  dated  December  5,  1874,  and  due  December  1,  1904. .  2,500,000 

First  Consolidated  6%  Bonds  of  The  Peoples  Gas  Light  &  Coke 

Company,  dated  April  1,  1893,  and  due  April  1,  1943 4,900.000 

First  Mortgage  5%  Bonds  of  the  Chicago  Gas  Light  &  Coke  Com- 
pany, dated  July  1,  1887,  and  due  July  1,  1937 10,000,000 

First  Mortgage  6%  Bonds  of  The  Equitable  Gas  Light  &  Fuel  Com- 
pany of  Chicago,  dated  1885,  and  due  July  1,  1905 2,000,000 

First  Mortgage  5%  Bonds  of  the  Consumers  Gas  Company,  dated 

December  1,  1886,  and  due  December  1,  1936 4,246,000 

First  Mortgage  7%  Bonds  of  the  Illinois  Light,  Heat  &  Power  Com- 
pany, dated  November  18,  1885,  and  due  November  1,  1915. . .  500,000 

First  Mortgage  6%  Bonds  of  the  Lake  Gas  Company,  dated  July  1, 

1885,  and  due  July  1,  1915 ' 300,000 

First  Mortgage  5%  Bonds  of  the  Chicago  Economic  Fuel  Gas  Com- 
pany, dated  January  2,  1893,  and  due  January  1,  1916 2,500.000 

Total $29,046,000 

Since  August,  1897,  no  bonds  have  been  sold  or  shares  of  stock  issued 
by  the  Peoples  Gas  Light  &  Coke  Company  except  for  an  equivalent 
amount  in  cash,  less  such  discount  upon  the  bonds  sold  as  the  condition 
of  the  money  market  has  from  time  to  time  required. 

On  January  10,  1898,  the  Hyde  Park  Gas  Company  and  the  Mutual 
Fuel  Gas  Company  were  merged  with  the  Peoples  Gas  Light  &  Coke 
Company  and  under  the  agreement  of  the  consolidation  there  was  issued 
by  the  Mutual  Fuel  Gas  Company,  and  guaranteed  by  the  Peoples  Gas 
Light  &  Coke  Company,  $5,000,000  of  5  per  cent  bonds.  In  the  following 
year  the  Calumet  Gas  Company  was  included  in  the  merger  and  under 
the  agreement  of  the  consolidation  there  was  paid  for  this  company  $500,- 
000  to  be  used  in  retiring  an  equivalent  amount  of  that  company's  bonds, 
leaving  outstanding  bonds  to  the  amount  of  $250,000.  The  capital  stock 
of  this  company  and  also  the  stock  of  the  Hyde  Park  Gas  Company  and 
the  Mutual  Fuel  Gas  Company  were  surrendered  and  cancelled. 

The  Mutual  Fuel  Gas  Company  had  been  manufacturing  and  dis- 
tributing a  fuel  gas  which  proved  very  dangerous  in  operation.  It  was 
an  odorless  product  and  its  escape  could  not  be  detected  by  the  sense  of 
smell,  with  the  result  that  many  accidents  occurred  caused  by  the  escape 
of  this  fluid.  It  became  necessary  to  adopt  the  manufacture  and  dis- 
tribution of  a  different  kind  of  gas,  and  certain  of  the  owners  of  the 
Mutual  Fuel  Gas  Company  thereupon  organized  the  Universal  Gas  Corn- 
Company  and  obtained  a  charter  from  the  State  and  an  ordinance  from 
the  city  of  Chicago  in  August,  1894.  The  Universal  Gas  Company  erected 
a  large  plant  near  Thirty-first  street  and  the  Chicago  River  in  the  city 
of  Chicago,  and  by  means  of  large  mains  conveyed  the  gas  there  ID  aim- 


13 

facturecl  to  its  plant  in  Hyde  Park,  from  whence  it  was  distributed  to  the 
patrons  and  consumers.  This  company  supplied  a  few  consumers  along 
the  lines  of  its  transmission  main,  but  practically  its  only  business  was 
the  manufacture  of  gas  for  distribution  in  Hyde  Park.  The  Universal 
Gas  Company  was  acquired  by  individuals  largely  interested  in  the 
Peoples  Gas  Light  &  Coke  Company,  but  was  never  merged  into  that 
company,  and  finally  in  1906,  it  plant  was  leased  to  the  Peoples  Gas  Light 
&  Coke  Company  and  has  since  been  operated  by  that  company. 

The  Ogden  Gas  Company  was  incorporated  in  1895,  being  authorized 
by  the  city  to  construct  and  operate  gas-works  upon  and  under  the  streets, 
avenues  and  public  places  of  the  city  of  Chicago  for  the  purpose  of  manu- 
facturing and  distributing  illuminating  and  fuel  gas.  Its  franchise  grant 
extended  over  a  period  of  fifty  years.  The  lighting  quality  of  the  gas 
was  prescribed  and  the  price  therefor  fixed  at  90  cents  per  thousand 
cubic  feet,  with  a  rate  of  75  cents  per  thousand  cubic  feet  to  the  city  of 
Chicago.  Under  the  ordinance  the  company  was  required  to  pay  the  city 
annually  3y2  Per  cen^  of  its  gross  revenue  from  the  sale  of  gas.  The 
plant  was  constructed  by  a  corporation  representing  the  same  interests  as 
those  to  whom  the  franchise  was  granted.  This  company  was  prominent 
in  a  number  of  serious  rate  wars  which  finally  culminated  in  the  agree- 
ment by  the  Peoples  Gas  Light  &  Coke  Company  to  lease  the  property, 
with  the  consent  of  the  City  Council  of  Chicago,  and  at  a  specified  date 
in  the  future  to  purchase  the  property  and  redeem  the  bonded  indebt- 
edness. This  agreement  was  the  result  of  a  rate  war  with  the  competing 
company,  the  Mutual  Fuel  Gas  Company,  which  had  leased  the  mains  of 
the  Peoples  Gas  Light  &  Coke  Company,  and  was  effected  after  the  pur- 
chase of  a  controlling  interest  in  the  Ogden  Gas  Company  by  a  syndi- 
cate friendly  to  the  Peoples  Gas  Light  &  Coke  Company.  The  Ogden 
Gas  Company  has  since  been  conducted  and  operated  by  the  latter  com- 
pMiiy. 

GROWTH  OF  BUSINESS. 

Since  the  consolidation  of  1897  the  growth  of  the  company  has  been 
very  rapid.  With  the  elimination  of  the  ruinous  competition  and  all  the 
expense  incident  to  the  numerous  rate  wars  and  litigation,  the  position 
of  the  business  under  a  single  management  has  steadily  improved.  New 
uses  have  been  found  for  gas  and  the  consumption  has  increased  enor- 
mously. Since  the  above  date  the  number  of  meters  installed  with  con- 
sumers has  been  increased  from  230,293  to  522,536;  the  number  of  gas 
stoves  has  increased  from  20,343  to  305,279 ;  the  mileage  of  street  mains 
from  1,584  miles  to  in  excess  of  2,500  miles;  while  the  earnings  from 
the  sale  of  gas  have  more  than  doubled.  At  the  same  time  the  capital 
Jiabilities  of  the  company  have  been  increased  to  $35,000,000  of  stock  and 
$40,096,000  of  bonds.  The  plant,  which  at  the  time  of  the  merger  con- 


14 

sisted  of  a  number  of  scattered  manufacturing  stations,  has  been  greatly 
improved  by  the  better  location  of  stations  for  the  most  economical  manu- 
facturing results.  Several  of  the  stations  obtained  at  the  time  of  the 
consolidation  were  not  in  the  best  of  physical  condition  and  had  appar- 
ently been  constructed  to  satisfy  the  immediate  needs  and  at  as  reason- 
able a. cost  as  possible  in  the  hope  of  ultimately  disposing  of  the  prop- 
erty. Some  of  these  stations  have  since  been  dismantled  and  replaced 
by  modern  producing  units,  while  all  the  stations,  both  those  used  for 
manufacturing  and  for  pumping  purposes,  are  in  excellent  condition 
and  contain  the  most  modern  and  efficient  apparatus.  The  capacity  of 
the  stations  has  been  greatly  enlarged  to  meet  current  needs  and  pro- 
vision has  been  made  for  extensive  enlargements  of  the  plant  to  supply 
capacity  for  future  requirements. 

The  following  tables  show  the  condensed  income  accounts,  the  con- 
densed balance-sheets  and  the  plant  statistics  covering  the  period  from 
1898  to  1910,  inclusive,  as  contained  in  the  published  annual  statements : 


15 


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SED  BALANCE  SHEETS. 
1898-1910. 


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22 


PLANT  STATISTICS. 

1898-1910. 


Year. 

Street 
Mains, 
Miles. 

Meters. 

Gas 

Stoves. 

Public 
Lamps. 

Arc 
Lamps. 

1898 

5845 

230  293 

20343 

28023 

1899 

705  7 

274  604 

47639 

25  121 

1900  
1901 

,729.0 
7966 

300,077 
323  089 

66,845 
83771 

24,980 
24911 

1902 

866  7 

342  150 

105  844 

25,090 

1903  
1904  
1905  
1906  
1907  
1908  
1909  
1910 

,871.6 
,939.5 
2,028.6 
2,103.1 
2,311.7 
2,366.4 
2,484.3 
2,568.9 

347,750 
359,327 
376,051 
392,397 
446,723 
469,084 
496,615 
522,536 

125,181 
147,222 
170,925 
197,619 
229,194 
254,362 
279,080 
305,279 

24,948 
24,974 
24,608 
23,673 
22,643 
21,085 
17,630 
18,060 

28,477 
33,337 
39,448 
45,714 
60,822 
75,025 
84,335 
87,261 

VALUATION  OF  PROPERTY. 

METHODS   PURSUED. 

The  valuation  upon  which  a  gas  utility  is  entitled  to  a  reasonable 
rate  of  return,  consistent  with  the  risks  inherent  in  the  business,  is  the 
fair  present  value  of  the  property  used  and  useful  in  the  production, 
distribution  and  sale  of  gas.  This  value  consists  of  two  principal  divi- 
sions, namely :  the  physical  plant  and  the  intangible  or  going  value  of 
the  plant.  The  former  value  embraces  the  land  and  buildings  of  the 
company,  distribution  mains,  services  and  meters,  gas  holders,  horses 
and  vehicles,  stores  on  hand  and  the  allowance  for  working  capital. 
The  going  value  of  the  plant  exists  by  virtue  of  the  plant  being  a  live, 
operating  unit,  supplying  gas  to  those  customers  wrho  have  been  induced 
to  subscribe  to  the  service,  thus  giving  to  the  company  an  established 
income,  in  the  development  of  which  large  expenditures  have  been  made 
in  one  form  or  another  by  the  investor  and  doubtless  numerous  losses 
sustained.  Together,  they  constitute  the  legitimate  and  honest  invest- 
ment of  the  stockholder  and  represent  the  amount  on  which  he  is  entitled 
to  a  reasonable  return. 

To  arrive  at  the  value  of  the  property  several  methods  ..are  possible, 
any  one  of  which  may  be  satisfactory  or  unsatisfactory,  depending  upon 
the  condition  of  the  construction  records  of  the  company  and  the  condi- 
tions under  which  the  plant  was  constructed  and  the  business  developed. 
The  value  of  the  plant  for  the  purpose  of  rate  adjustment  can  not  be 
computed  from  the  cost  records  alone.  It  must  be4  determined  from  a 
consideration  of  all  the  elements  making  for  value,  of  which  the  principal 
ones  are  the  original  cost  of  the  plant,  its  reproduction  cost  new  as  of 
to-day,  its  reproduction  cost  new  less  depreciation  to  show  the  fair  pres- 


23 

ent  value,  the  cost  of  developing  the  business,  the  amount  of  outstanding 
securities  and  the  earning  capacity  of  the  plant.  No  formula  or  mathe- 
matical rule  can  be  blindly  followed,  but  from  all  the  facts  and  elements 
of  value  it  is  necessary  to  apply  a  reasonable  judgment  to  the  end  that 
substantial  justice  shall  be  done  to  both  the  public  and  the  investor. 

In  this  instance  the  methods  of  arriving  at  the  value  of  the  plant 
have  been  restricted  by  conditions  over  which  neither  the  city  nor  the 
company  had  entire  control.  The  present  property,  as  already  outlined, 
is  a  consolidation  of  several  competing  plants,  the  records  of  which  are 
not  available  to-day.  Many  of  the  books  and  records  of  the  merged  com- 
panies were  never  turned  over  to  the  consolidated  company.  Even  if  they 
were  in  its  possession  to-day  the  data  could  not  be  given  the  greatest  con- 
sideration because  of  the  conditions  under  which  such  plants  were  con- 
structed. Several  plants  were  poorly  erected,  with  insufficient  regard 
for  the  future  wear  and  tear  of  the  property  and  often  represented 
unnecessary  duplication  of  facilities.  To  attempt  to  analyze  the  con- 
struction account  from  the  company's  records  to-day  would  therefore 
be  impossible,  both  because  of  the  incompleteness  of  the  records  and 
because  abnormal  charges  have  been  made  to  this  account  which  can  not 
be  considered  as  capital  to-day.  The  value  has  therefore  been  arrived  at 
by  the  appraisal  of  the  property. 

Ordinarily,  in  undertaking  an  appraisal  the  first  step  would  be  to 
make  a  complete  detailed  inventory  of  all  the  property  of  the  company, 
to  be  followed  by  a  study  of  the  local  conditions  affecting  the  cost  of  such 
work,  the  age  of  each  unit  of  equipment,  the  degree  to  which  it  has  been 
maintained  and  its  adaptability  to  the  service  required,  together  with 
the  determination  of  the  unit  prices  to  be  used,  and  finally,  the  applica- 
tion of  such  prices  to  the  determined  inventory.  In  the  present  case 
much  of  this  work  was  not  undertaken  for  the  reason  that  a  complete 
inventory  in  general  carefully  prepared  was  submitted  by  the  company 
through  its  engineers.  The  inventory  was  submitted  in  the  following 
groups:  (1)  detailed  description  of  each  important  building  and  unit 
of  apparatus;  (2)  tabulations  of  the  size  and  mileage  of  mains;  (3)  the 
number  and  size  of  meters  and  services  in  use;  and  (4)  field  books 
which  contain  the  miscellaneous  items,  such  as  cast  and  wrought  iron 
piping,  tools,  fences,  docks,  walks,  paving  about  the  plant  and  sundry 
small  items.  The  cost  of  reproduction  for  each  of  the  items  mentioned 
was  included  with  the  inventory,  which  was  sufficiently  detailed  to  enable 
the  unit  quantities  to  be  checked.  This  was  particularly  the  case  as 
regards  buildings  and  foundations.  Exhibits  were  also  available  show- 
ing the  method  of  arriving  at  the  cost  of  the  various  parts  of  the  dis- 
tribution system.  While  the  inventory  made  unnecessary  the  detailed 
field  work  of  checking  and  classifying  every  piece  of  property,  it  was  not 
accepted  without  an  inspection  of  all  the  plant  and  a  check  of  the  more 


24 

important  items  included  in  the  exhibits  in  order  to  prove  their  correct- 
ness. 

APPRAISAL. 

The  value  of  the  land  owned  by  the  company  was  obtained  from  an 
appraisal  of  this  property  made  by  the  valuation  committee  of  the 
Chicago  Real  Estate  Board.  This  appraisal  was  submitted  by  the  com- 
pany as  its  estimate  of  the  land  value.  The  classification  was  checked 
against  the  land  occupied  by  the  company  and  which  it  was  reported  to 
own.  The  reasonableness  of  the  appraisal  was  verified  by  comparing  the 
amounts  with  the  prices  paid  for  land  in  the  neighborhood  of  the  parcel 
under  consideration.  The  values  so  furnished  were  accepted  as  repre- 
senting the  best  evidence  available. 

The  company's  detailed  building  inventory  was  checked  item  for 
item  in  making  the  appraisal  of  this  portion  of  the  property.  Building 
plans  on  file  with  the  company  were  examined  before  any  inspection  of 
the  premises  was  undertaken  and  important  dimensions  were  checked. 
"Where  the  building  plans  were  not  available  it  was  necessary  to  secure 
all  the  information  by  visits  to  the  structures  in  question.  In  addition 
to  checking  the  quantities,  the  inspection  work  also  covered  a  general 
examination  in  order  to  determine  the  specifications  for  all  materials, 
the  character  of  the  maintenance  and  such  additional  matters  as  would 
affect  either  the  cost  of  construction  or  the  present  value.  The  depth  of 
underground  foundations  was  taken  from  the  plans  and  from  the  state- 
ments of  superintendents,  and  in  each  case  it  wras  determined  whether 
it  was  in  keeping  with  common  practice  for  similar  soil  conditions.  The 
unit  prices  applied  to  the  quantities  found  wrere  compared  with  the 
company's  own  records  covering  the  construction  in  question.  Local 
contractors,  including  some  who  had  performed  a  large  portion  of  the 
company's  work  and  who  were  familiar  with  present  conditions  in  this 
city  and  vicinity,  were  interviewed  as  to  the  cost  of  labor  and  material. 
The  prices  used  in  each  case  covered  the  actual  cost  of  the  work,  plus  a 
fair  contractor's  profit.  Where  it  had  been  necessary  to  remove  dirt 
from  the  premises,  the  excavation  cost  was  made  sufficiently  high  to 
cover  such  expenses.  The  value  of  the  new  office  building  just  com- 
pleted for  the  company  was  taken  from  the  company's  books. 

To  prove  the  inventory  submitted  for  the  machinery  and  apparatus 
each  station  was  visited  by  machinery  and  building  inspectors,  separate 
forms  were  prepared  upon  which  were  classified  the  various  units  of 
apparatus  reported  by  the  company  and  their  correctness  as  to  type, 
age,  workmanship  and  per  cent  of  condition  noted.  "Where  the  inventory 
was  insufficient  additional  information  was  secured  in  this  manner. 
Besides  checking  the  items  contained  in  the  inventory,  these  inspections 
embraced  a  general  survey  of  each  station,  particularly  with  a  view  of 


25 

ascertaining  the  probable  accuracy  of  the  numerous  items  included  in 
the  field  books.  While  the  machinery  was  examined  with  the  same  detail 
as  would  have  been  followed  had  no  inventory  been  available,  it  was 
much  simplified  by  the  cooperation  of  the  company  in  this  manner,  since 
the  apparatus  was  listed  and  it  was  necessary  only  to  verify  the  inven- 
tory and  to  record  information  not  contained  therein.  In  certain 
instances  discrepancies  were  disclosed  between  the  inventory  description 
and  the  apparatus  as  found  which  were  adjusted  in  conferences  with  the 
engineers  of  the  company. 

In  arriving  at  the  unit  prices  to  be  used  an  effort  was  made  to  have 
the  figures  represent  present  conditions  in  the  city  of  Chicago.  Prices 
for  iron  and  steel,  cast  iron  pipe,  labor  and  all  other  items  entering  into 
the  cost  of  construction  fluctuate  from  year  to  year  with  the  condition 
of  business,  as  is  reflected  in  the  cycles  of  industrial  activity  and  depres- 
sion. Because  of  these  conditions  it  was  necessary  to  use  average  prices, 
since  to  use  either  the  highest  or  lowest  prices  during  the  last  five  years 
would  be  equally  unfair.  In  comparing  such  prices  with  those  actually 
paid  by  the  company  it  was  observed  that  because  of  its  very  large 
requirements  each  year  and  the  facilities  and  skill  of  its  officers  in  the 
making  of  purchases  it  was  able  to  secure  contracts  at  substantial  con- 
cessions from  the  prevailing  market  prices.  The  position  of  the  company 
in  this  respect  is  typical  of  large  industries  generally.  It  is  well  known 
that  there  is  considerable  difference  in  the  ability  of  companies  to  pur- 
chase at  low  figures.  As  a  rule,  the  larger  companies  are  able  to  pur- 
chase more  favorably  than  the  smaller  ones  because  of  their  larger 
requirements  and  also  because  of  more  favorable  market  and  shipping 
facilities  in  large  cities.  There  are,  however,  obstacles  wrhich  tend  to 
increase  costs  due  to  the  higher  wage  scales  prevailing  in  large  cities  and 
the  additional  costs  incurred  in  construction  wrork  because  of  the  con- 
gested traffic  conditions  in  the  streets.  In  this  instance,  however,  there 
can  be  no  question  but  what  the  company  is  securing  prices  on  contracts 
which  on  the  whole  compare  very  favorably  with  the  general  market. 
It  is  therefore  evident  that  local  conditions  and  the  particular  facilities 
of  the  company  in  question  must  be  given  full  consideration  in  deter- 
mining the  proper  units  to  apply  in  the  appraisal  of  a  given  property. 

In  general,  the  benefits  of  favorable  purchase  of  operating  supplies 
and  material  for  construction  purposes  belong  to  the  investor!  To 
deprive  him  of  the  benefits  due  to  skill  in  management  and  operation 
would  be  to  destroy  every  incentive  for  economy  and  efficiency.  It  does 
not  follow7,  however,  that  every  economy  is  to  be  credited  to  the  com- 
pany, for  the  public  is  entitled  to  the  benefit  of  that  degree  of  intelli- 
gence and  technical  skill  which  can  reasonably  be  expected  of  men 
entrusted  with  responsibilities  of  administering  a  property  so  large  as 
the  plant  in  question.  The  best  evidence  of  reasonable  prices  to  be  used 


26 

for  this  purpose  was  therefore  to  be  found  in  the  records  of  the  company 
itself.  Wherever  possible,  examination  was  made  of  the  company's  con- 
tracts and  vouchers  to  determine  how  favorably  its  purchases  were  made, 
and  from  such  records  averages  were  taken.  For  this  purpose  a  large 
number  of  contracts  was  submitted  by  the  company  for  cost  analysis. 
Prices  which  departed  materially  from  the  average,  or  were  at  great 
variance  with  the  market,  were  submitted  to  the  officials  of  the  company 
for  additional  information  and  explanation.  Wherever  it  appeared  that 
a  contract  was  placed  at  a  price  in  excess  of  what  was  reasonably  to  be 
expected  under  the  circumstances,  the  amount  was  reduced.  In  those 
instances  where  it  appeared  that  the  company  secured  an  extraordinary 
bargain,  the  benefits  of  such  saving  were  allowed  to  the  company  and 
only  those  prices  were  used  which  appeared  reasonable  and  just.  In  the 
figures  as  finally  adopted  the  average  embraced  many  instances  where1 
the  unit  costs  as  shown  by  the  company's  own  records  wrere  slightly 
increased. 

In  placing  values  on  specific  apparatus  various  features  were  con- 
sidered. In  general  machinery  of  the  same  capacity  varies  greatly  in 
price,  due  to  the  quality  of  the  material,  the  character  of  workmanship, 
the  type  of  construction,  the  use  of  patented  devices  and  other  features. 
The  unfairness  of  using  a  single  unit  price  for  all  machinery  of  the  same 
capacity  was  at  once  apparent.  In  the  present  appraisal  an  effort  was 
made  to  give  careful  consideration  to  every  feature,  and  the  more  impor- 
tant units  of  equipment  were  appraised  only  after  additional  informa- 
tion had  been  secured.  Where  such  machinery  was  installed  under  con- 
tract, the  detailed  costs  thereof  were  easily  analyzed.  Where  the  instal- 
lation was  made  by  the  company  itself  an  addition  was  made  covering 
the  costs  which  would  reasonably  be  incurred  in  the  proper  placing  of 
the  equipment  under  normal  conditions. 

It  was  found  that  during  the  last  few  years  several  classes  of  machin- 
ery, particularly  water  gas  generators,  had  been  built  by  the  company 
for  its  own  use.  The  actual  cost  of  construction  in  each  case  was  obtained 
and  was  found  to  be  much  below  the  price  for  which  such  equipment 
could  be  purchased  in  the  open  market.  The  prices  for  units  of  substan- 
tially the  same  character  were  obtained  from  the  various  manufacturers 
for  comparison  with  the  costs  as  shown  in  the  company's  records.  In 
placing  the  value  on  this  equipment  for  the  purpose  of  this  appraisal  the 
figures  used  contained  an  addition  of  what  was  believed  to  be  a  fair 
allowance  for  burden  and  profit  to  the  actual  cost  of  the  apparatus.  In 
this  manner  the  economies  of  construction  due  to  the  peculiar  facilities 
developed  by  the  company  were  credited  to  the  company,  for  it  was 
believed  that  the  public  was  entitled  to  no  better  price  than  the  most 
favorable  price  which  the  market  provided  for  a  unit  of  similar  capacity 
and  efficiency. 


27 

Considerable  difficulty  was  encountered  in  determining  the  reason- 
ableness of  the  value  placed  upon  the  items  included  in  the  field  books. 
They  constituted  an  unclassified  mass  of  unlike  items,  ranging  in  value 
from  a  few  cents  to  thousands  of  dollars.  To  properly  arrive  at  what 
constituted  a  fair  value  for  this  property  it  was  necessary  to  classify  the 
many  items  into  fourteen  separate  groups  and  to  apply  the  proper  units 
in  each  case.  The  prices  of  most  of  the  classes  of  property  as  submitted 
by  the  company  were  found  to  be  substantially  correct,  The  same  was 
true  with  regard  to  the  allowance  for  labor  wherever  this  entered  as  an 
element  of  cost,  although  in  a  few  instances  revisions  were  found  neces- 
sary. The  value  of  such  large  items  as  docks,  tracks,  paving  and  side- 
walks at  stations,  fences,  etc.,  were  revised  where  specific  instances 
showed  such  to  be  necessary.  In  a  number  of  cases  the  company's  basis 
of  estimating  the  value  of  the  work  in  question  was  not  accepted  and 
additional  information  was  secured  from  the  general  officers.  Numerous 
conferences  were  held  in  which  the  differences  were  thoroughly  dis- 
cussed and  in  most  instances  a  conclusion  was  arrived  at  which  was 
accepted  as  substantially  correct. 

In  the  appraisal  of  the  company's  holders  the  method  used  was  similar 
to  that  used  in  valuing  the  machinery  and  apparatus.  Equipment  of  this 
character  can  not  be  valued  on  a  cost  per  unit  or  capacity  basis  without 
detailed  information  concerning  the  type  of  the  apparatus  and  the  condi- 
tions surrounding  its  construction.  In  this  instance  it  was  necessary  to 
secure  all  the  information  which  was  afforded  by  the  specifications  cover- 
ing the  foundation  work  and  the  erection  of  the  steel  work.  The  masonry 
work  was  estimated  on  the  basis  of  present  prices  for  concrete,  brick 
work,  excavation  and  piling,  and  the  values  arrived  at  were  in  general 
somewhat  above  the  contract  prices.  Detailed  estimates  of  weight  for 
holders  of  various  types  of  construction  were  made.  In  arriving  at  the 
final  values,  full  consideration  was  given  to  market  prices  and  the  type 
of  construction  in  each  instance.  The  large  holders  were  valued  on  what 
amounted  substantially  to  a  pound-price  basis. 

In  appraising  the  distribution  system  different  methods  were  neces- 
sary. Owing  to  the  fact  that  the  mains  and  services  could  not  be 
inspected,  it  was  necessary  to  resort  to  the  records  of  the  company.  These 
records  consisted  of  maps  and  atlases  drawn  carefully  to  scale  and  show- 
ing the  proper  location  of  the  mains,  valves,  drips  and  specials.  The 
atlases  of  the  company  are  drawrn  to  a  scale  of  100  feet  to  the  inch.  This 
scale  was  carefully  verified  and  found  to  be  correct.  All  such  maps  were 
scaled  and  each  run  of  pipe  located  and  the  points  between  which  it  was 
laid,  together  with  the  size  of  the  pipe  and  the  date  when  laid,  were 
noted.  This  record  was  summarized  to  show  the  different  sizes  of  pipe 
and  the  amount  of  each  size,  and  also  the  amount  of  pipe  laid  during  each 
year.  The  total  length  of  pipe  as  scaled  from  the  company's  records  was 


28 

somewhat  less  than  the  total  as  arrived  at  from  the  records  of  the  con- 
solidated companies,  but  agreed  substantially  with  the  company's  own 
scaling  of  the  atlases.  These  maps  were  prepared  by  the  company  since 
the  consolidation  in  1897  and -have  been  corrected  wherever  errors  and 
omissions  were  found.  They  have  been  tested  by  making  excavations  at 
various  points,  and  it  is  believed  they  constitute  the  best  record  of  the 
extent  of  the  distribution  system.  As  a  test  of  the  accuracy  with  which 
the  scaling  from  these  records  could  be  done,  the  24-inch  main  laid  dur- 
ing the  last  twro  years  was  totaled  from  the  original  work  orders  and 
scaled,  the  amount  so  obtained  agreeing  with  the  record  length  within 
two-tenths  of  one  per  cent. 

In  arriving  at  the  present  unit  costs  to  be  applied  in  the  distribution 
system,  it  was  decided  to  use  the  company's  records  of  actual  expendi- 
tures for  a  number  of  years,  believing  that  these  costs  most  nearly  repre- 
sent the  cost  of  such  work  to-day  under  the  conditions  which  prevail  in 
this  city.  With  this  in  view,  the  various  individual  construction  under- 
takings shown  by  the  atlases  to  have  been  made  within  the  last  ten  years 
were  analyzed  and  the  original  work  orders  which  are  used  in  the  regular 
course  of  business  by  the  company  were  secured.  This  anaylsis  did  not 
include  all  the  pipe  laid  during  these  years,  because  in  a  number  of  cases 
the  construction  work  as  entered  on  the  record  did  not  show  the  date 
when  the  work  was  performed.  The  analysis,  however,  did  include  con- 
struction Avork  on  all  sizes  of  pipe  between  four  inches  and  thirty  inches 
in  diameter,  and  may  be  regarded  as  representative  of  the  cost  of  laying 
mains  not  only  during  these  years,  but  as  a  fair  unit  cost  for  the  present. 
These  work  orders  showed  in  detail  the  amount  of  material  used  and  the 
labor  employed.  The  material  included  the  pipe,  specials,  small  fittings, 
lead,  coal,  blocking,  etc.  The  labor  was  shown  in  the  detailed  statement 
in  such  form  that  it  was  possible  to  determine  the  expense  for  foremen 
and  supervision,  calkers  and  common  labor.  To  secure  this  detailed 
information,  it  was,  therefore,  necessary  to  analyze  and  tabulate  these 
work  orders.  Many  hundred  of  such  orders,  including  over  three  hun- 
dred six-inch  pipe  construction  orders  and  all  orders  where  other  than 
six-inch  pipe  was  laid,  were  analyzed  in  this  manner.  From  the  sum- 
mary of  all  such  tabulations  it  was  found  that  the  costs  were  substan- 
tially the  same  in  the  three  districts  in  the  city,  i.  e.,  the  North  Division, 
the  West  Division  and  the  South  Division.  For  this  reason  a  single  unit 
cost  was  used  for  the  different  classes  of  property  throughout  the  city. 
In  arriving  at  the  total  as  thus  used,  full  consideration  was  given  to  the 
relatively  higher  cost  of  construction  work  where  small  amounts  were 
involved.  The  cost  of  four-inch  pipe  and  thirty-inch  pipe  appeared 
abnormal,  due  to  the  fact  that  so  small  an  amount  of  pipe  of  these  sizes 
was  laid.  Since  the  work  orders  did  not  contain  any  provision  for  the 
use  of  tools  and  teams,  it  was  necessary  to  make  adjustments  for  this 


29 

purpose.  The  work  orders  did  include  the  cost  incurred  in  disturbing 
paving  where  this  was  done,  but  did  not  include  the  cost  of  repaying. 
Every  effort  was  made  to  have  the  final  units  agree,  in  so  far  as  appeared 
just,  with  the  actual  construction  costs  as  shown  by  the  company's  rec- 
ords and  conditions  known  to  exist  at  present. 

The  most  important  item  of  material  in  the  distribution  system  is  the 
main  pipe.  Cast-iron  pipe  varies  widely  in  price  at  different  times  of  the 
year,  and  also  from  year  to  year.  It  being  the  object  in  this  appraisal 
to  use  prices  which  are  representative  of  present  conditions,  and  which  it 
is  believed  could  be  secured  in  the  reproduction  of  an  enterprise  on  a 
scale  of  the  property  in  question,  it  seemed  advisable  to  use  a  unit  which 
would  be  an  average  price  over  a  number  of  years.  It  is  a  matter  of  com- 
mon knowledge  and  substantiated  by  the  records  of  the  company,  that  the 
largest  purchases  of  pipe  are  not  made  at  a  time  when  prices  are  the 
highest.  As  a  rule,  purchases  are  made  on  a  more  liberal  scale  when  prices 
are  low,  at  which  time  contracts  are  entered  into  covering  the  require- 
ments for  a  considerable  period  of  time,  deliveries  being  made  as  called 
for.  In  fixing  the  price  for  this  pipe  the  company's  contracts  for  cast- 
iron  pipe  from  1901  to  1910  were  tabulated.  The  variation  in  price 
ranged  from  $22  to  over  $34  per  ton.  Since  a  comparatively  small  amount 
of  pipe  was  laid  when  the  price  was  at  the  highest,  it  would  appear  unfair 
to  use  an  average  of  these  two  figures.  A  weighted  average  was,  there- 
fore, used  which  was  secured  by  multiplying  the  contract  price  for  each 
year  by  the  number  of  tons  purchased  at  the  particular  price  as  shown 
by  the  contract.  The  total  of  such  figures  was  the  total  amount  of  pipe 
purchased  and  the  total  prices  paid,  from  which  was  computed  the  proper 
average  price  of  $26.10  per  ton.  Due  to  the  differential  which  usually 
exists  between  the  large  and  small  sizes  of  pipe  an  allowance  was  made 
of  $1  additional,  so  that  the  average  cost  of  $26.10  per  ton  was  used  for 
six-inch  pipe  and  larger  sizes,  while  $27.10  per  ton  was  used  for  four- 
inch  pipe.  Since  these  prices  did  not  include  the  cost  of  teaming  nor  the 
use  of  tools,  adjustments  were  necessary  and  a  percentage  computed  from 
the  company's  records  was  allowed  to  cover  these  expenditures. 

The  method  of  arriving  at  the  cost  of  services  was  similar  to  that 
described  in  regard  to  mains.  It  was,  however,  impracticable  to  secure 
all  the  original  work  orders,  but  instead  a  recapitulation  of  these  work 
orders  was  used  which  had  been  compiled  from  year  to  year  by  the  com- 
pany in  the  regular  course  of  its  business.  These  summaries  were  kept 
with  much  detail  prior  to  1904,  since  which  date  much  less  information  is 
contained  in  the  records.  A  careful  analysis  was  made  of  all  the  records 
in  possession  of  the  company  for  the  period  from  1900  to  1904  covering 
one  and  a  half  inch  service  pipes,  which  is  the  size  of  the  greatest  number 
of  services.  By  making  comparisons  it  was  found  that  the  cost  of  labor 
per  service  was  substantially  the  same  in  recent  years  as  it  was  in  the 


30 

years  immediately  preceding-  1904.  The  price  to  be  allowed  for  the 
service  piping-  was  the  same  as  that  used  by  the  company  for  wrought- 
iron  pipe  at  the  station,  to  which  cost  was  added  l1/^  cents  per  foot  to 
cover  the  cost  of  preparing  pipe  with  protective  coatings.  It  was  also 
necessary  to  adjust  the  average  price  used  for  fittings  because  it  was 
found  that  certain  services  were  installed  without  a  curb  box  and  cock. 
From  all  the  data  which  could  be  obtained  and  the  tabulations  based  upon 
the  records,  it  was  decided  that  $1  for  fittings  represented  a  fair  average 
for  one  and  a  half  inch  services  and  those  of  smaller  size.  The  larger 
services  were  allowed  curb  box  and  cock,  the  cost  of  which  was  taken 
from  the  summarized  cost  of  the  services.  The  labor  cost  on  the  larger 
services  varied  greatly,  with  the  result  that  the  average  cost  was  uncer- 
tain. Special  attention  was  directed  to  the  irregularity  shown  in  the 
analysis  of  these  larger  services,  and  the  resulting  figure  arrived  at  is 
believed  to  be  fair  to  the  company  and  to  the  public.  The  amount 
involved  in  connection  with  the  larger  services  is  comparatively  small 
and  could  not  appreciably  affect  the  result.  The  service  pipes  when 
finally  installed  consist  of  a  number  of  small  articles  which  are  handled 
through  storehouses,  making  it  necessary  to  add  a  reasonable  charge  for 
warehouse  and  storage  service  and  also  a  charge  covering  the  cost  of  tools. 

The  value  of  meters  and  meter  connections  in  this  appraisal  is  based 
on  the  present  actual  cost  to  the  company.  Here  again  it  was  necessary 
to  add  to  the  bare  cost  a  percentage  covering  storeroom  charges  and  a 
small  additional  charge  to  cover  the  handling  and  first  test  of  the  meter. 
The  cost  of  the  original  installation  was  graded  proportionally  to  the 
size  of  the  meters,  and  the  average  cost  per  meter  represents  the  average 
cost  of  installation  during  the  last  two  years,  which  cost  is  accepted  as 
most  nearly  representing  present  costs. 

The  company's  value  for  house  governors  was  accepted.  There  are 
in  the  streets  a  number  of  vaults  which  contain  district  governors  used 
in  connection  with  the  booster  system.  The  work  orders  for  54  out  of  a 
total  of  58  of  these  vaults  were  secured  and  used  as  a  basis  for  the  cost 
of  material  and  labor  in  placing  governors  in  vaults.  To  the  final  cost 
in  this  case  there  was  also  added  an  allowance  for  the  use  of  tools.  The 
value  of  the  masonry  work  in  the  construction  of  the  vaults  was  taken 
from  the  contracts  covering  their  construction.  There  are  at  present 
seven  tunnels  under  the  river  owned  by  the  company.  To  arrive  at  what 
represents  a  fair  price,  information  in  addition  to  that  possessed  by  the 
company  was  sought  from  parties  acquainted  with  work  of  this  character, 
and  the  unit  costs  for  the  different  materials  and  classes  of  labor  were 
obtained  from  this  analysis  and  investigation. 

The  miscellaneous  classes  of  property  representing  minor  items  in  the 
inventory  and  valuation  were  accepted  after  investigation  as  being  sub- 
stantially correct  and  were  so  entered  in  the  detailed  tables. 


31 


INDIRECT  OR  OVERHEAD  CONSTRUCTION  CHARGES. 

The  different  classified  values  above  referred  to  embrace  only  the 
costs  of  labor  and  material,  or  the  direct  costs.  There  must  be  added  to 
the  cost  of  each  item  of  equipment,  or  to  the  value  of  the  sum  of  all  such 
items,  a  certain  amount  to  cover  the  indirect  or  overhead  cost.  This  cost 
is  made  up  of  a  number  of  items  of  which  the  most  important  are  legal 
and  organization  expenses,  engineering  and  supervision,  interest  during 
construction,  fire  and  liability  insurance  during  construction,  taxes,  if 
the  period  of  construction  is  of  considerable  length,  and  an  allowance  for 
hazards  and  contingencies  during  construction.  While  all  agree  that 
allowance  must  be  made  for  overhead  expense  for  each  of  the  items  enu- 
merated, much  difference  of  opinion  exists  as  regards  the  amount  to  be 
allowed.  Although  the  valuation  of  the  property  is  to  be  determined 
largely  on  the  theory  of  reproduction  cost,  it  does  not  necessarily  follow 
that  these  costs  should  be  determined  upon  a  basis  more  or  less  hypo- 
thetical, but,  on  the  contrary,  that  consideration  should  also  be  given  to 
the  actual  costs  incurred  in  constructing  the  plant  in  question.  The 
records  of  the  company  are  the  best  evidence  as  to  what  such  overhead 
expenses  should  be,  and  full  weight  has,  therefore,  been  given  to  the  cost 
shown  for  expenditures  of  this  character  for  a  number  of  the  items  during 
the  last  few  years.  The  figures  used  are  based  on  the  theory  of  the  plant 
being  constructed  over  a  number  of  years,  or  what  is  generally  called 
the  piecemeal-  construction  plan.  If  all  the  overhead  charges  were  based 
on  the  company's  records  for  recent  years  the  amount  would  clearly  be 
too  small.  It  is,  therefore,  assumed  for  the  determination  of  this  question 
that  the  plant  will  be  reproduced  over  a  period  of  approximately  ten 
years,  but  it  does  not  seem  reasonable  that  the  same  units  of  cost  which 
are  incurred  in  the  construction  of  the  first  half,  or  the  first  third  of  the 
plant,  should  be  used  for  the  entire  plant.  In  arriving  at  a  fair  over- 
head charge,  the  assumed  years  of  construction  have  been  divided  into 
three  periods  and  the  items  of  expense  increased  or  reduced  as  shown  to 
be  justified  from  actual  construction  records  and  the  history  of  the  plant 
in  question. 

It  is  safe  to  assume  for  the  purpose  of  this  appraisal  that  the  first 
third  of  the  plant  was  constructed  under  the  least  favorable  conditions. 
The  credit  of  the  company  being  low  at  this  time,  the  addition  for  inter- 
est was  placed  at  6  per  cent.  It  is  known  that  the  bonds  issued  for  the 
first  construction  expenses  were  sold  at  substantial  concessions.  The 
interest  charges  would  not  apply  for  the  full  period  since  as  soon  as  any 
part  of  the  plant  was  completed  it  would  be  put  into  operation.  Fur- 
ther, construction  work  could  be  carried  on  only  during  about  six  or 
eight  months  of  the  year,  so  that  the  time  for  which  the  interest  must  be 
paid  would  be  considerably  less  than  the  full  period  during  which  the  first 


32 

third  of  the  construction  was  completed.  Engineering  expense  during 
this  period  is  placed  at  5  per  cent,  which  is  the  usual  charge  for  work 
of  this  character.  Organization  and  legal  expenses  would  be  highest  dur- 
ing the  first  period,  during  which  time  the  company  would  be  incor- 
porated and  its  various  contracts  subject  to  examination  and  titles  to 
property  verified.  It  would  seem  that  3  per  cent  is  a  reasonable  addi- 
tional allowance  for  this  purpose.  One  per  cent  is  allowed  for  taxes.  In 
addition  to  the  above  charges  there  is  added  7  per  cent  for  contingencies, 
hazards  and  omissions,  making  a  total  overhead  charge  of  22  per  cent  for 
the  first  third  of  the  property. 

During  the  second  period  of  the  company's  construction  work  con- 
siderable progress  would  have  been  made  and  the  management  of  the 
company  would  have  reached  an  efficient  stage.  Additions  for  interest 
charges  on  construction  during  this  period  have  been  placed  at  5  per 
cent  and  the  organization  expense  at  2  per  cent.  Engineering  expense, 
it  is  assumed,  will  require  a  5  per  cent  charge,  since  the  construction  of 
the  plant  was  proceeding  on  a  very  large  scale  and  at  a  rapid  pace. 
With  the  perfection  of  the  organization  and  the  development  generally 
of  the  plant,  it  is  believed  that  the  allowance  for  contingencies  should 
not  be  as  large  as  during  the  earliest  period,  and  5  per  cent  is  added  for 
this  purpose.  The  foregoing  allowances  provide  a  total  overhead  charge 
of  17  per  cent  on  what  represents  the  second  or  middle  period  of  con- 
struction work. 

During  the  third  of  the  assumed  periods  it  is  believed  that  substan- 
tial economies  can  be  secured  which  should  be  shared  with  the  public. 
To  provide  the  same  high  indirect  charges  for  this  period  of  construction 
as  were  provided  for  the  first  period  would  be  contrary  to  established 
practice  and  must  result  in  excessive  overhead  charges.  It  is  an  estab- 
lished fact  that  the  engineering  service  at  this  stage  of  development  was 
performed  chiefly  by  the  company's  own  staff,  part  of  whose  services 
were  engaged  for  the  benefit  of  the  operating  department,  so  that  the 
cost  thereof  should  be  distributed  over  operation  and  construction.  This 
is  true  of  every  large  utility  construction  work.  An  addition  of  4  per 
cent  for  engineering  and  superintendence  is  deemed  reasonable.  With 
the  large  development  of  business  which  the  company  has  secured  by  this 
time  and  the  practical  monopoly  which  it  possesses  of  the  gas  business, 
it  is  natural  that  a  relatively  higher  credit  will  have  been  established  and 
that  money  can  be  secured  at  a  lower  rate.  An  allowance  of  3  per  cent 
is  added  for  this  purpose.  Organization  expenses  during  this  period  will 
be  very  much  reduced  and  consist  only  of  the  examination  of  contracts 
and  titles  involved  in  transactions  connected  with  the  extension  of  the 
plant,  which  requirements  should  not  exceed  one  per  cent.  Contingen- 
cies are  provided  for  in  an  additional  allowance  of  4  per  cent.  These 
additions  are  equivalent  to  12  per  cent  of  the  direct  costs  during  the  last 


33 

third  of  the  total  plant  construction.  The  allowance  for  overhead  or 
indirect  charges  on  the  total  property  is,  therefore,  equivalent  to  the  aver- 
age of  the  rate  applied  during  each  of  the  three  assumed  periods  of  con- 
struction, or  an  average  of  17  per  cent.  This  addition  is  included  in  the 
tables  showing  the  plant  valuation. 

It  would  seem  that  17  per  cent  is  an  unreasonable  overhead  charge  to 
add  to  the  value  of  the  land,  since  engineering  expense  is  not  incurred  to 
as  great  an  extent  as  in  the  construction  of  the  plant  as  a  whole,  nor  does 
the  item  of  contingencies  materially  affect  the  cost  of  the  land.  The 
interest  charge,  however,  should  be  somewhat  larger  than  that  for  the 
construction  work,  since  the  purchase  of  land  represents  probably  the 
iirst  investment.  Instead  of  17  per  cent,  it  is  believed  that  12  per  cent 
is  more  nearly  correct,  which  amount  has  been  used  in  this  appraisal. 
This  allowance  appears  especially  fair  since  this  percentage  is  applied 
to  the  present  value  of  the  land  instead  of  to  the  smaller  amount  repre- 
senting the  original  investment. 

In  judging  the  fairness  of  the  above  overhead  charges  it  must  be 
borne  in  mind  that  the  unit  costs  used  in  this  appraisal  are  based  upon 
the  piece-meal  construction  of  the  property  as  determined  from  the  com- 
pany ?s  records,  and  further,  that  certain  portions  of  the  property  now 
in  service  were  constructed  under  contracts  which  included  some  provi- 
sion for  engineering  and  superintendence,  together  with  a  part  of  the 
contingency  expense.  Since  the  unit  prices  were  obtained  largely  from 
the  company's  records,  the  amounts  used,  therefore,  include  some  provi- 
sion for  overhead  charges.  This,  in  general,  is  true  with  respect  to  the 
cost  of  the  buildings,  holders  and  such  apparatus  as  purifiers,  condensers 
and  scrubbers.  The  addition,  therefore,  of  17  per  cent  to  these  costs  for 
overhead  expenses  must  be  accepted  as  fair. 

DISCOUNTS. 

Closely  allied  to  the  subject  of  overhead  charges,  but  differing  in 
several  particulars,  is  the  additional  construction  charge  due  to  discounts 
on  bonds.  In  other  words,  provision  must  be  made  in  the  appraisal  for 
the  cost  of  the  funds  with  which  to  finance  the  undertaking.  Not  to 
allow  any  sum  in  this  valuation  for  discounts  on  bonds  issued  for  con- 
struction purposes  would  be  equivalent  to  assuming  that  a  sum  of  money 
as  large  as  is  required  to  construct  a  plant  of  the  magnitude  of  that  under 
investigation  could  be  obtained  for  investment  in  a  somewhat  hazardous 
undertaking  without  any  price  for  such  funds.  It  would  be  equivalent 
to  assuming  that  capital  seeks  such  investments  without  inducement, 
being  willing  to  incur  the  risks  of  the  industry  in  return  for  no  more  than 
a  reasonable  profit.  The  financing  of  corporations  in  the  past  and  at  the 
present  time  clearly  shows  that  securities  bearing  a  fair  rate  of  interest 
can  rarely  be  sold  at  a  price  netting  par  to  the  corporation. 


34 

The  amount  of  the  discount  on  securities  is  detemined  by  a  number 
of  factors,  chief  of  which  are  the  credit  position  of  the  company,  the 
interest  rate  which  the  bond  bears,  the  condition  of  the  money  market 
and  the  life  of  the  bond.  Naturally,  the  company  whose  business  is  firmly 
established  and  whose  record  has  been  a  prosperous  one  can  dispose  of 
its  construction  bonds  at  a  comparatively  low  discount,  while  a  new  com- 
pany, untried  in  its  field  and  whose  business  is  yet  in  an  uncertain  stage 
of  development,  must  pay  a  heavy  discount  if  it  would  dispose  of  its 
issues  at  all.  Discriminating  investors  find  little  to  encourage  them  in 
paying  par  for  an  issue  of  uncertain  merit.  The  security  which  it  is 
sought  to  dispose  of  must  compete  for  favor  with  all  other  investment 
issues  in  the  open  competitive  money  market  and  the  discount  there 
exacted  must  be  regarded  as  a  cost  of  securing  the  funds,  just  as  addi- 
tional charges  are  incurred  over  and  above  the  bare  construction  cost  in 
securing  the  physical  plant.  There  is  no  escape  from  this  conclusion, 
especially  when  the  bonds  can  not  be  sold  on  any  other  terms.  It  may 
be  possible  to  escape  the  discount  by  paying  a  sufficiently  high  interest 
rate  to  attract  capital,  but  such  a  step  would  mean  a  heavy  burden  on 
the  earnings  throughout  the  entire  life  of  the  bonds. 

Under  normal  conditions  the  discount  on  bonds  is  almost  inevitable. 
The  amount  of  such  discount  may.be  charged  to  capital  or  to  operating 
expenses.  Where  the  utility  can  not  be  constructed  at  the  time  when  the 
public  demands  the  service  to  be  furnished,  except  through  the  sale  of 
its  securities  at  a  discount,  such  discount  creates  a  charge  which  the  pub- 
lic should  bear  as  the  cost  of  securing  the  service  at  such  time.  If  the 
construction  work  had  been  postponed  until  the  money  market  was  more 
favorable  or  until  the  city  had  grown  to  a  point  where  the  success  of  the 
industry  was  made  more  certain,  the  public  would  have  been  deprived 
during  such  period  of  the  benefits  which  the  company  was  to  furnish. 
To  supply  a  large  amount  of  money  at  a  particular  time  entails  heavy 
expenses.  These  charges  must  be  met  by  some  party.  The  company  can 
not  escape  paying  the  amount  of  the  discount  at  some  future  date,  and 
its  financial  program  must  be  shaped  with  this  end  in  view.  If  operating 
expenses  are  to  be  charged  with  the  discount  the  company  must  be  very 
prosperous  in  order  to  have  sufficient  margin  over  its  current  charges 
and  the  fixed  expenses  on  prior  issues  of  securities.  It  would  also  mean 
that  the  cost  of  securing  the  utility  through  this  method  would  be  paid 
for  by  those  who  used  the  service  during  the  early  years  of  development. 
To  charge  the  discount  to  construction  means  that  until  amortized 
through  sinking-fund  operations  the  customers  throughout  the  life  of  the 
bond  are  gradually  meeting  this  charge.  Under  certain  conditions  dis- 
counts should  be  wiped  out  through  the  surplus  account  or  a  suspense 
account,  but  under  financial  conditions  most  frequently  encountered  they 


35 

must  be  considered  as  a  cost  of  construction,  and  in  this  disposition  offi- 
cials of  the  company  have  practically  little  choice. 

If  the  discount  is  to  be  charged  to  construction,  and  this  would  seem 
to  be  proper,  especially  where  it  is  known  that  most  of  the  securities  of 
this  company  were  put  out  at  a  substantial  concession,  it  becomes  a 
problem  to  determine  the  amount  of  such  allowance.  Clearly  the  dis- 
count would  be  highest  during  the  early  years  of  development,  and  much 
reduced  when  the  success  of  the  plant  and  its  earning  capacity  is  estab- 
lished. Under  normal  conditions,  such  discounts  range  from  5  to  20 
per  cent  as  affected  by  the  facts  in  each  particular  case. 

It  is  known  that  some  of  the  bonds  issued  for  construction  purposes 
by  this  company,  and  bearing  interest  at  the  rate  of  6  per  cent,  sold  at 
a  price  as  low  as  80,  or  at  a  discount  of  20  per  cent.  The  most  recent 
issue  of  bonds  sold  at  a  price  fractionally  under  par.  In  most  instances, 
prior  to  1897,  the  discount  was  in  excess  of  10  per  cent.  In  arriving  at 
an  amount  which  fairly  represents  the  discount  charge  to  be  allowed 
here,  consideration  has  been  given,  both  to  the  price  for  which  the  dif- 
ferent issues  have  been  sold  or  cost  of  construction  theory,  and  to  what 
would  be  a  reasonable  discount  to-day  under  the  cost  of  reproduction 
theory.  The  former  was  entirely  a  matter  of  record.  The  latter  was 
determined  from  interviews  with  those  familiar  with  the  sale  of  securities 
and  a  study  of  the  investment  market.  From  both  the  weighted  average 
of  the  discounts  on  the  bonds  issued  since  the  consolidation  in  1897  and 
the  probable  discount  on  the  securities  if  the  plant  were  reconstructed 
to-day,  it  is  believed  that  an  allowance  of  6  per  cent  for  this  expense  is 
reasonable. 

APPORTIONMENT  OF   PROPERTY. 

Not  all  of  the  property  owned  by  the  company  is  being  used  in  the 
manufacture,  distribution  and  sale  of  gas  to  the  people  of  Chicago.  Aside 
from  the  investment  in  land,  buildings,  apparatus,  holders  and  distribu- 
tion system  used  directly  for  this  purpose,  considerable  property  is  used 
exclusively  for  the  distribution  of  natural  gas,  a  separate  service  which 
the  company  is  furnishing  under  a  franchise  of  one  of  the  companies 
embraced  in  the  consolidation  of  1897.  The  company  also  owns  some  real 
estate  which  it  acquired  in  the  settlement  of  obligations  due  to  it,  which 
property  is  now  being  rented.  Certain  of  the  old  manufacturing  stations 
acquired  in  1897  have  since  become  unserviceable  and  a  part  of  one  of 
them  has  been  rented  to  the  Pintsch  Gas  Company,  which  manufactures 
gas  for  car-lighting  purposes,  while  a  portion  of  another  plant  has  been 
rented  to  a  manufacturing  company.  The  company  is  also  the  owner  of 
a  large  modern  office  building,  only  a  part  of  which  is  used  for  its  own 
purpose.  Apportionments  have  been  made  of  all  the  property  so  as  to 
determine  what  amount  is  used  and  useful  in  the  manufactured  gas  serv- 


36 

ice  and  the  natural  gas  service  and  what  amount  is  to  be  considered  as 
commercial  property.  The  separation  between  the  manufactured  gas 
property  and  the  natural  gas  property  has  been  made  to  enable  a  cost 
analysis  for  each  service. 

The  tables  below  show  the  classification  of  the  physical  property  and 
the  additions  to  the  direct  costs  representing  the  overhead  or  indirect 
charges  and  also  the  discount  on  the  securities  represented  by  the  amount 
of  the 'plant  cost.  The  property  has  been  classified  so  as  to  show  both 
the  cost  new  and  the  present  value  of  the  investment  in  the  manufacturing 
stations,  distribution  system  and  the  miscellaneous  equipment,  with  the 
subdivision  of  the  property  above  referred  to  showing  the  investment  in 
manufactured  gas  property,  natural  gas  property  and  commercial  prop- 
erty. 


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38 


UTILITY  OPERATIVE  PROPERTY— Continued. 
MANUFACTURED  GAS. 

Cost  Present 

Distribution  System:  New.  Value. 

Mains  (2,097.23  Miles) $11,173,109  $10,471,899 

Meters 3,922,163  2.745,514 

Services 4,532,487  2,932.117 

Street  Governors  and  Vaults 153,291  149,882 

Tunnels 147,000  138,180 

Total $19,928,050  $16,437,592 

Miscellaneous: 

Dwellings  at  64th  Street $  33,928  $  23,750 

Automobiles,  Horses,  Wagons,  etc 112,589  95,701 

Old  Furniture 52,513  22,759 

New  Furniture 195,575  195,575 

Total $374,605  $337,785 

NATURAL  GAS. 
Distribution  System: 

Mains  (250.90  Miles) $1,637,026  $1,496,022 

Services 401,725  268,440 

Meters 106,825  74,778 

Total $2,145,576  $1,839,240 

NON-OPERATIVE  PROPERTY. 
Equitable : 

Land $131,760 

Buildings  and  Structures 60,307 

Holders 15,507 

Station  Equipment 293,869 

Total $501,443 

50th  St.  and  Forrestville  Ave. : 

Land $1,250 

Buildings  and  Miscellaneous  Structures 800 

Station  Equipment 1,460 

Total $3,510 

Superior  Street: 

Land 69,426 

Green  Street: 

Land 36,000 

40th  Street: 

Land 2,000 

Town  of  Worth: 

Land , 150 

Total    Non-operative    Property    (excluding    office 

building) $612,529 


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*The  Non-operatn 

40 

DEPRECIATION    OF   PROPERTY. 

The  difference  between  the  reproduction  cost  new  of  the  physical 
property  and  its  present  value  is  $6,786,538,  which  represents  the  esti- 
mated depreciation  through  wear  and  tear  and  obsolescence.  To  offset 
this  reduction  in  value,  the  company  should  have  created  a  depreciation 
reserve  to  which  should  be  credited  annually  an  amount  charged  to 
operating  expenses  equal  to  the  estimated  depreciation  of  the  plant  dur- 
ing the  year.  The  rate  of  return  to  which  the  investor  is  entitled  should 
be  applied  on  the  fair  present  value  of  the  property.  If  the  property 
has  depreciated,  and  no  allowance  has  been  made  to  restore  the  capital 
so  consumed,  the  rate  of  return  must  apply  on  the  depreciated  value  of 
the  plant  instead  of  on  the  cost  new.  If,  as  a  matter  of  law,  the  present 
value  of  the  plant  is  equal  to  the  reproduction  cost  new,  less  depreciation 
the  present  value  of  the  investment  should  be  enhanced  by  an  amount 
which  the  company  has  set  aside  for  the  replacement  of  those  units  which 
have  decreased  in  value  through  age  and  use.  The  company  in  this  case 
has  charged  operating  expenses  annually  with  an  amount  which  it  deemed 
sufficient  to  offset  the  depreciation.  These  charges,  although  large  in  the 
aggregate,  are  not  sufficient  to  equal  the  difference  between  the  cost  new 
and  the  present  value.  The  reserve  for  depreciation  on  December  31r 
1909,  as  shown  by  the  company's  books,  was  $1,617,095.  In  some  respects, 
the  amount  shown  to  the  credit  of  such  a  specific  reserve  is  largely  a 
book-keeping  transaction,  the  important  consideration  in  each  instance 
being  whether  the  company  actually  possesses  property  which,  if  not  set 
aside  for  specific  depreciation  purposes,  could  be  set  aside  without  doing 
violence  to  any  other  obligation.  This  is  believed  to  be  the  situation  here. 
The  company  has  earned  large  sums  during  recent  years  which  it  might 
have  set  aside  for  depreciation-  had  the  officers  so  decided.  Its  earnings 
have  exceeded,  by  a  liberal  margin,  all  necessary  requirements,  but 
instead  of  creating  a  reserve  for  depreciation  sufficiently  large  to  represent 
the  estimated  depreciation  of  the  property,  such  surplus  earnings  have 
been  placed  to  the  credit  of  other  accounts  from  which  they  may  be  trans- 
ferred by  book  entry  to  the  depreciation  reserve  when  occasion  requires. 
It  is,  therefore,  assumed  that  the  board  of  directors,  being  in  a  position 
to  protect  the  assets  of  the  company  against  wear  and  tear,  will  take  such 
steps  as  will  insure  the  maintenance  of  the  physical  investment  by  the 
use  of  any  funds  now  available  for  that  purpose,  although  not  specifically 
set  aside  at  this  date  for  that  use.  Since  such  assets  are  ample  in  amount, 
the  value  of  the  physical  property  through  the  addition  of  these  amounts 
is  considered  on  the  basis  of  its  cost  new. 

WORKING   CAPITAL. 

Because  of  the  nature  of  the  gas  industry  the  amount  to  be  allowed 
for  working  capital  can  be  determined  with  reasonable  accuracy.  Such 


41 

an  allowance  should  embrace  the  cash  requirements  of  the  company  for 
current  use,  together  with  the  quick  assets  readily  convertible  into  cash. 
The  amount  of  working  capital  will  vary  with  every  industry,  depending 
upon  the  frequency  of  collections,  the  amount  of  materials  and  supplies 
tied  up  in  the  process  of  manufacture  at  any  one  time,  the  amount  of 
supplies  which  it  is  necessary  to  have 'on  hand  at  all  times,  the  probable 
cash  demands  on  the  company,  etc.  An  analysis  of  the  conditions  affect- 
ing the  industry  in  Chicago  indicates  clearly  the  more  important  ele- 
ments governing  the  amount  of  working  capital. 

In  this  connection,  it  must  be  borne  in  mind  that  the  company  is 
operating  a  very  large  business  which,  aside  from  any  conditions  peculiar 
to  the  industry,  requires  a  large  working  capital.  Its  pay-roll  shows  many 
thousand  employees  who  are  paid  at  frequent  intervals.  The  operating 
expenses  constitute  a  very  large  amount,  and  in  addition  to  the  regular 
requirements  in  every  business,  to  which  this  is  no  exception,  demands 
are  constantly  arising  which  can  not  reasonably  be  anticipated,  and  to 
meet  these  demands  additional  cash  is  required.  To  take  advantage  of 
favorable  markets,  the  company  must  have  available  funds  by  means  of 
which  it  can  reduce  both  the  charges  to  capital  and  the  operating  expense. 
It  is  desirable  that  all  bills  be  promptly  paid  and  that  advantage  be  taken 
of  all  discount  privileges.  During  the  last  few  years  the  cash  resources 
of  the  company  have  ranged  from  approximately  $1,000,000  to  nearly 
$3,000,000.  From  its  experience  during  a  number  of  years  the  company 
has  found  that  it  is  inexpedient,  and  not  without  certain  elements  of  dan- 
ger, to  permit  the  cash  on  hand  to  fall  below  $1,000,000. 

The  amount  of  material  and  supplies  on  hand  as  shown  by  the 
inventory  is  very  large  and  at  first  glance  appears  unreasonably  so. 
These  stores  consist  chiefly  of  coal,  coke  and  oil.  The  daily  requirements 
of  the  company  are  very  heavy  and  to  insure  itself  in  the  possession  of 
sufficient  material  to  permit  the  operation  of  the  plant  without  interrup- 
tion due  to  freight  congestion,  strikes  and  unfavorable  weather,  large 
stores  are  necessary.  If  no  supply  were  carried  to  guard  against  such 
contingencies  excessive  prices  would  be  demanded  at  a  time  when  coal 
strikes,  rail  strikes  or  storms  prevent  the  movement  of  certain  supplies, 
while  at  certain  times  it  would  be  difficult  to  obtain  the  necessary  ma- 
terial at  any  price.  These  large  stores  are  further  made  necessary  because 
the  sources  from  which  the  company  receives  its  material  are  long  dis- 
tances from  this  city.  Favorable  contracts  and  the  choice  of  rail  and 
water  routes  for  shipment  reduce  these  requirements  to  some  extent,  but 
prudence  dictates  that  stores  approximately  as  large  as  those  shown  in 
the  inventory  be  kept  on  hand. 

Against  these  more  or  less  unfavorable  features  requiring  a  large 
working  capital  are  the  advantages  arising  from  the  sale  of  gas  and  the 
absence  of  any  violent  fluctuations  in  the  operating  expenses  and  in- 


42 

ventory  accounts.  The  amount  of  sales  for  each  month  is  not  subject  to 
great  variation  and  the  company  is  therefore  able  to  estimate  with  a  con- 
siderable degree  of  accuracy  the  money  which  it  will  have  at  any  time  to 
meet  current  obligations.  Under  the  present  schedule  of  charges  for  gas 
a  penalty  of  10  cents  per  thousand  cubic  feet  is  charged  in  case  of  failure 
to  pay  bills  promptly.  The  amount  unpaid  at  the  expiration  of  the  dis- 
count periods  rarely  exceeds  eight  per  cent.  On  these  arrears  the  com- 
pany receives  a  profit  of  10  cents  per  thousand  cubic  feet.  With  the  city 
divided  into  many  districts  so  that  all  the  customers'  payments  are  not 
due  at  the  same  time,  the  cash  is  received  in  large  volume  each  day  and 
the  necessity  for  temporary  borrowing  from  this  cause  is  reduced  to  a 
minimum.  With  respect  to  its  collections  the  gas  company  is  undoubtedly 
in  a  more  favorable  position  than  a  commercial  enterprise  doing  a  busi- 
ness of  the  same  proportion. 

The  stores  account,  the  pay-roll  requirements  and  the  current  assets 
of  the  company  do  not  fluctuate  through  a  very  wide  range.  Whatever 
changes  take  place  are  largely  seasonal  and  can  be  anticipated  by  the 
officers  of  the  company.  The  following  table  shows  the  range  of  the  gas 
stores  account,  accounts  receivable  and  the  pay-roll  through  a  twelve- 
months period: 

1910.  Gas  Stores.          Acc'ts  Receivable.      Pay  Roll. 

January $1,098,551.87  $1,856,054.41  $253,175.65 

February 1,178,042.95  1,735,428.78  240,782. 12 

March 1,316,230.06  1,628,258.12  268,474.39 

April 1,382,814.87  1,604,220.79  293,341 .47 

May 1,331,026.21  1,562,717.27  304,670.56 

June 1,320,725.43  1,521,618.04  297,669.41 


July. 
August 
September. 
October .  .  . 
November . 
December . 


,300,020.29  1,448,670.32  290,038.86 

,235,679.30  1,460,753.06  297,371.79 

,219,047.51  1,620,872.88  277,316.07 

,183,797.54  1,761,298.46  281,126.80 

,156,609.23  1,743,654.28  272,229.69 

,140,011.03  1,734,090.46  272,811.79 


The  best  information  as  to  what  constitutes  a  reasonable  allowance  for 
working  capital  is  supplied  by  the  balance  sheets  showing  the  current 
assets  and  the  current  liabilities.  In  examining  these  statements  it  must 
be  borne  in  mind  that  during  the  last  three  years  the  company  has  been 
engaged  in  very  extensive  construction  work  and  has  sold  additional 
securities  which  shows  in  the  material  increase  in  the  cash  on  hand.  So 
much  of  the  balance  sheets  as  is  material  to  the  determination  of  the 
working  capital  is  shown  in  the  tabulation  below  for  the  last  five  years: 


Current  Assets: 
Cash  

$1,322,664 

$   987,965 

$3  207  644 

$3  546  428 

$4  819  934 

Accounts  receivable.  .  .  . 
Gas  Stores  and  Supplies. 

1,220,377 
832,398 

1,476,514 
1,384,791 

1,485,021 
1,142,873 

1,747,491 
1,071,247 

1,734,090 
1,140,011 

Total  

$3,375,439 

$3,849,270 

$5,835,538 

$6,365,166 

$7,694,035 

Current  Liabilities  .... 

$739,466 

$1,185,272 

$1201,359 

$1,187,383 

$1,531,150 

43 

There  is  no  fixed  rule  by  which  the  amount  of  working  capital  can  be 
computed.  The  range  of  maximum  and  minimum  allowance  can  be 
ascertained  with  reasonable  accuracy,  but  there  are  numerous  demands 
on  the  company  which  are  not  reflected  in  the  balance  sheet,  but  must 
be  arrived  at  through  the  application  of  a  reasonable  judgment.  Among 
such  items  mention  may  be  made  of  cash  requirements  to  guard  against 
contingencies,  the  allowance  for  temporary  financing  of  plant  extensions, 
the  cost  of  gas  Avhich  has  been  consumed  by  the  customer  since  the  last 
reading  of  his  meter  and  also  the  cost  of  gas  in  the  holders  and  dis- 
tribution system.  A  review  of  all  the  balance  sheet  items  and  other 
factors  materially  affecting  working  capital  must  lead  to  the  conclusions 
that  an  allowance  for  1909  of  $3,200,000  is  approximately  correct 
This  amount  is  therefore  used  in  the  computation  of  the  investment 
value  upon  which  the  stockholders  are  entitled  to  a  reasonable  return. 

INTANGIBLE   PROPERTY. 

The  analysis  showing  a  valuation  of  $49,023,947  as  the  cost  of  the 
property  applies  to  the  physical  plant  alone.  This,  however,  does  not 
necessarily  represent  the  entire  investment  of  the  stockholder  upon  which 
he  is  entitled  to  a  return.  In  addition  to  the  physical  value  of  the  prop- 
erty allowance  must  be  made  for  such  items  of  intangible  property  as 
the  company  possesses.  While  courts  have  stated  in  a  number  of  deci- 
sions the  various  elements  of  value,  all  of  which  must  be  taken  into 
consideration  in  arriving  at  the  final  amount  upon  which  the  rate  of 
return  is  to  be  computed,  all  agree  that  the  value  of  the  property  for  the 
purpose  of  rate-making  is  substantially  the  reproduction  value,  or  the 
value  of  the  property  at  the  time  of  the  investigation,  thus  giving  credit 
for  every  increment  in  value  and  making  allowance  for  the  depreciation 
which  has  taken  place.  While  the  strictest  adherence  to  the  reproduction 
theory  may  work  hardship  to  one  party  in  a  particular  case,  the  rule 
can  be  applied  with  reason,  and  when  so  followed  undoubtedly  repre- 
sents the  established  law.  On  this  basis  the  company  insists  that  the 
reproduction  cost  includes  the  value  of  the  franchise  and  the  going  value 
of  the  corporation.  No  specific  amount  was  suggested  which  appeared 
fair  to  the  officers  of  the  company,  nor  was  any  method  submitted  by 
which  these  values  could  be  determined,  but  it  was  claimed  that  the 
valuation  used  in  the  adjustment  of  the  rates  must  recognize  an  allow- 
ance for  these  intangible  assets,  both  of  which  are  indefinite  and  ex- 
tremely difficult  of  determination. 

The  Peoples  Gas  Light  &  Coke  Company  is  operating  under  a  per- 
petual franchise  of  its  own  and  has  secured  by  purchase  the  franchises 
of  a  number  of  other  gas  companies  which  have  been  merged  into  the 
present  corporation.  These  franchises,  it  is  claimed,  possess  a  large  com- 
mercial value,  and  to  exclude  them  from  the  investment  would  be 


44 

equivalent  to  taking  private  property  for  public  purposes  without  due 
compensation.  The  term  "franchise"  is  clearly  understood  and  the 
question  of  its  value  from  the  standpoint  of  rate  regulation  has  been  the 
subject  of  court  decisions,  and  while  these  are  not  as  specific  as  might 
be  desired,  the  reasoning  of  the  court  and  the  dicta  of  other  cases  sug- 
gests a  disposition  of  the  question  here  which  it  is  believed  will  be  just 
in  view  of  the  conditions  under  which  the  so-called  franchise  value  has 
arisen.  The  term  ' '  going  value ' '  has  never  been  defined  by  the  courts  or 
students  of  public-service  problems  in  a  manner  to  meet  with  general 
acceptance.  Its  existence,  however,  has  been  recognized  by  all  the  courts 
and  public-service  commissions  and  it  must  be  allowed  in  computing  the 
amount  of  the  investment.  Whether  such  value  exists  as  an  incident  of 
the  physical  plant,  whether  it  is  entirely  independent  of  the  physical 
value  and  to  be  determined  from  other  sources  of  information,  as,  for 
example,  the  number  of  customers  or  the  gross  earnings,  or  whether 
such  value  may  deserve  no  consideration  as  an  addition  to  the  physical 
plant,  depends  largely  upon  the  definition  adopted. 

A  franchise  authorizes  the  use  of  private  property  in  a  particular 
manner  and  generally  conveys  an  exclusive  right.  In  this  particular 
instance  the  right  issued  from  the  people  for  the  specific  purpose  of 
having  the  grantees  of  that  right  use  it  for  the  public  good  in  the  opera- 
tion of  a  gas  utility  and  with  such  profit  to  themselves  as  was  represented 
by  a  reasonable  return  upon  the  capital  actually  invested.  There  is  no 
proof  that  the  company  paid  any  value  for  this  original  right.  It  was  a 
grant  for  which  the  people  received  nothing  in  return  except  the  service 
to  be  furnished.  The  company  made  no  franchise  investment  of  its  own 
at  the  time  or  thereafter.  Its  expenditures  in  constructing  the  gas  plant 
and  the  development  of  the  business  represented  investments  in  the 
business  and  not  in  the  franchise.  It  is  only  by  virtue  of  the  franchise 
that  the  business  itself  could  be  developed.  The  mere  granting  of  such 
a  franchise  or  privilege  conveys  with  it  no  right  on  the  part  of  the 
grantees  to  a  separate  value  in  the  franchise  above  the  amount  paid  for 
it,  distinct  from  its  use  in  the  business  for  which  it  was  granted,  which 
the  parties  may  capitalize  as  against  the  public  in  rate  adjustment 
proceedings. 

To  grant  a  value  for  the  franchise  as  against  the  public,  when  no 
payment  was  made  therefor  to  the  public  would  be  to  increase  the  value 
of  the  investment  of  the  company  and  hence  increase  the  cost  of  gas. 
The  question  for  the  purpose  of  this  valuation  is  two-fold :  first,  does  the 
franchise  possess  value;  and  secondly,  can  it  possess  a  value  and  the 
amount  thereof  be  excluded  in  arriving  at  what  constitutes  a  reasonable 
rate?  Without  going  into  any  lengthy  discussion  of  these  two  questions 
and  their  bearing  on  the  rates  in  this  investigation,  the  reason  for  taking 
the  course  which  was  pursued  can  easily  be  shoAvn.  That  franchises 


45 

represent  property  is  elementary.  They  are  eagerly  sought  by  capital 
for  the  privilege  of  serving  the  public  and  the  promise  of  profit  which 
such  service  holds  forth.  They  pass  from  one  interest  to  another  for 
substantial  consideration,  in  none  of  which  the  public  ordinarily  shares. 
These  prices  may  be  large  because  the  profits  under  the  existing  rate 
schedule  are  liberal,  but  since  such  rates  are  subject  to  revision  to  a  point 
where  they  cease  to  be  unreasonable  it  is  impossible  to  see  how  such 
valuation  can  long  rest  on  this  basis.  Until  the  public  sees  fit  to  reduce 
the  rates  such  profits  are  legal  for  the  stockholders,  but  they  do  not 
constitute  a  basis  for  capitalization  against  the  public. 

If  a  franchise  possesses  any  public  value  it  must  be  such  a  value  as 
will  inure  to  the  owners  of  the  franchise  because  of  the  exercise  of  the 
privilege  conveyed,  subject  to  the  legal  and  moral  limitations  surround- 
ing it.  Any  value  based  on  excessive  rates  is  purely  commercial  and 
does  not  exist  as  against  the  public,  since  the  franchise  can  not  justly 
be  exercised  for  that  purpose.  Since  the  utility  is  at  all  times  authorized 
to  charge  rates  which  will  yield  reasonable  returns,  it  may  be  assumed 
that  any  commercial  value  which  attaches  to  the  franchise  is  due  to  the 
general  desire  on  the  part  of  capital  to  seek  an  investment  from  which  a 
reasonable  return  can  always  be  obtained  without  serious  risk  to  the 
invested  principal.  In  the  last  analysis  payments  for  franchises  really 
indicate  that  certain  investors  are  willing  to  pay  a  bonus  for  the  right 
to  engage  in  a  particular  utility  service  in  the  city  in  question,  the 
amount  paid  representing  the  capitalization  of  the  difference  between 
the  rate  -of  return  deemed  reasonable  for  the  utility  purchased  and  the 
rate  which  the  purchasers  are  willing  to  accept  on  their  investment. 
Especially  does  this  appear  true  when  the  losses  in  developing  the  busi- 
ness are  considered  as  costs  and  permitted  in  the  capital  account.  Under 
this  theory  the  commercial  value  of  a  franchise  represents  the  price 
which  capital  is  willing  to  pay  for  a  safe  income.  If  rates  are  always 
retained  at  the  point  of  reasonableness  no  great  sum  will  ever  be  paid 
for  the  franchise  and  if  payment  is  made  it  should  be  to  the  city,  in 
which  case  the  amount  may  justly  be  capitalized.  If  payments  for 
-franchises  are  very  large  with  respect  to  the  value  of  the  physical 
property  it  would  indicate  that  the  schedule  rates  of  the  utility  pur- 
chased are  too  high,  or,  what  is  equivalent  thereto,  that  the  rate  of 
return  deemed  reasonable  is  higher  than  it  should  be  in  the  judgment 
of  capital  seeking  investment. 

Further,  the  regulation  of  rates  may  be  an  exercise  of  the  police 
power,  but  it  is  not  equivalent  to  condemnation,  even  though  the  market 
value  of  the  property  may  be  affected  at  the  time.  If  the  rate  reduction 
is  based  upon  correct  grounds  it  will  be  because  the  schedule  has  been 
unreasonably  high,  and  since  the  franchise  was  granted  to  serve  the 
public  only  at  reasonable  rates,  the  reduction  of  the  value  due  to  the 


46 

existence  of  excessive  rates  is  but  the  removal  of  a  value  which  existed 
subject  only  to  the  public  will  and  sufferance.  Rate  reduction,  therefore, 
when  correctly  made  eliminates,  as  against  the  public,  the  value  which 
existed  only  by  public  consent  and  not  as  a  matter  of  right ;  condemna- 
tion is  the  actual  taking  of  private  property  for  a  public  purpose  which 
in  its  private  sphere  was  based  upon  the  general  principles  of  ownership 
of  property.  In  the  light  of  these  general  considerations  no  allowance 
is  made  in  this  investigation  for  franchise  value.  It  is  not  intended  to 
claim  that  such  franchise  has  no  value.  On  the  contrary,  it  is  believed 
that  the  perpetual  right  to  manufacture,  distribute  and  sell  gas  in  the 
city  of  Chicago  is  very  valuable  from  a  commercial  standpoint,  but  it  is 
claimed  that  as  such  right  was  a  grant  from  the  people  to  the  company 
without  payment  therefor,  or  any  other  restriction  on  the  freedom  of  its 
most  liberal  exercise,  the  company  has  made  no  investment  as  against  the 
public  upon  which  the  latter  should  be  held  to  pay  a  return. 

While  the  company  can  not  be  said  to  possess  a  property  value  as 
against  the  public  in  its  authority  to  use  its  private  property  in  a 
particular  manner  for  the  public  good,  it  must  be  conceded  that  an 
allowance,  intangible  in  its  nature  and  large  in  the  aggregate  must  be 
made,  not  as  a  franchise  right  but  as  a  necessary  cost  of  exercising  that 
franchise.  It  is  an  elementary  proposition,  the  correctness  and  justice 
of  which  must  appeal  to  every  mind,  that  the  franchise  to  operate  a 
public  utility  should  be  granted  with  the  least  possible  restriction  in 
order  not  to  increase  the  capital  investment,  and  that  the  company  when 
once  supplied  with  the  franchise  should  be  left  to  develop  its  business 
without  hindrance  and  restraint  in  order  that  a  low  rate  for  service 
may  ultimately  be  obtained.  To  charge  a  large  sum  for  the  franchise 
only  adds  to  the  interest  burden  to  be  carried  by  the  public  and  likewise 
to  heap  one  burden  upon  another  in  the  exercise  of  that  franchise  by 
the  company  is  adding  costs  to  the  business  which  must  be  met  in  one 
form  or  another.  Fortunately  for  the  public  now,  it  did  not  exact  any 
charge  from  the  company  in  its  grant  of  the  original  franchise,  for  which 
the  public  is  free  from  burdensome  obligations  to-day,  but  in  its  attitude 
toward  the  gas  industry  in  this  city  since  the  business  was  established,  a 
most  expensive  policy  has  been  pursued  which  has  given  rise  to  sub- 
stantial investment  rights. 

The  history  of  the  gas  business  in  Chicago  extends  over  a  period  of 
more  than  sixty  years.  During  this  time  there  have  been  incorporated 
and  authorized  to  operate  in  this  city  a  large  number  of  independent 
and  competing  gas  plants.  The  details  of  the  business  development,  the 
number  of  companies  created,  the  bitter  competition  which  ensued,  the 
struggles  of  the  different  companies  for  existence,  the  combinations  and 
mergers  of  interests  and  the  legal  warfare  in  state  and  federal  courts  is 
briefly  outlined  in  the  historical  sketch  embodied  in  this  report.  One 


47 

franchise  after  another  was  granted  to  supply  the  people  with  gas  when 
the  streets  already  contained  mains  of  sufficient  capacity  to  supply  the 
demand,  and  plants  constructed  under  then  existing  franchises  possessed 
ample  facilities  and  were  provided  with  ample  capacity  to  furnish  all  the 
gas  required.  These  franchises  entirely  ignored  the  uncontrovertible 
fact  that  gas  utilities  are  natural  monopolies  and  that  to  authorize 
additional  companies  for  the  purpose  of  creating  or  continuing  com- 
petition only  creates  economic  waste.  The  most  economical  construction 
and  operation,  the  most  satisfactory  service  and  consequently  the  lowest 
price  for  gas  is  possible  only  in  the  recognition  of  the  economic  law  that 
utilities  are  natural  monopolies  and  that  their  duties  can  best  be  dis- 
charged when  the  franchise  is  held  by  a  single  company  and  that  com- 
pany regulated  by  proper  administrative  agents  of  the  public.  The  best 
economic  thought,  substantiated  by  history  in  nearly  every  large  Amer- 
ican city,  is  that  all  efforts  to  compel  competition  in  public  service  must 
terminate  in  open  or  secret  combination.  To  authorize  several  gas 
utilities  to  operate  in  the  same  city  means  ultimate  duplication  of  plants 
and  the  wasting-  of  capital. 

It  is  impossible  to  trace  the  history  of  the  gas  business  in  Chicago 
without  realizing  that  the  policy  pursued  has  created  tremendous  losses. 
Plants  have  been  built,  streets  torn  up  and  the  development  of  the 
business  of  established  companies  greatly  hampered,  if  not  partly 
destroyed,  for  all  of  which  there  was  no  real  occasion.  To  protect  itself 
in  such  a  situation  there  was  little  which  an  established  utility  could  do 
except  to  purchase  its  rival  outright  or  to  enter  into  an  agreement  at 
the  earliest  possible  date  before  extensive  investments  were  made.  This 
situation  in  a  sense  created  prior  to  1897  a  ready  market  for  franchises 
and  the  prices  varied  with  the  possibilities  of  the  newer  companies  and 
probably  also  with  the  influence  of  grantees.  That  this  situation  with  its 
opportunity  for  private  profit  in  addition  to  the  desired  competition  was 
clearly  realized  may  be  assumed  from  the  number  of  franchises  granted 
and  the  prices  paid  therefor.  Unfortunately  the  records  of  these  many 
transactions  are  not  as  complete  as  they  should  be  in  order  to  make 
possible  the  most  satisfactory  analysis  of  the  intangible  values  due  to 
the  forced  investment,  but  there  appears  to  be  sufficient  data  to  warrant 
a  belief  that  some  of  those  who  were  entrusted  with  the  protection  of 
the  public  rights  and  also  certain  officers  of  the  purchasing  companies 
found  in  the  combinations  means  for  mutual  profit.  When  the  public, 
even  with  the  best  intention,  has  thrown  obstacles  in  the  way  of  develop- 
ment of  its  utilities,  leaving  them  no  option  except  to  remove  those 
obstacles  at  a  heavy  cost  or  to  engage  in  a  struggle  in  which  the  company 
must  inevitably  suffer,  such  burden  in  law  and  in  common  fairness  must 
be  regarded  as  an  investment  expenditure.  Where  such  expenditure  is 
increased  because  of  private  gain  this  amount  should  not  be  considered 


48 

as  an  addition  to  the  investment.  The  problem  in  each  case  is  to 
determine  the  legitimate  expenditure  which  the  existing  company  could 
not  avoid  because  of  the  city's  erroneous  policy. 

That  such  repeated  efforts  to  enforce  competition  create  investment 
values  of  an  intangible  nature  as  against  the  city  was  held  in  the  case 
of  Wilcox  v.  Consolidated  Gas  Company  (212  U.  S.,  19).  Prior  to  1884 
there  were  seven  gas  light  companies  in  New  York  City,  each  operated 
under  separate  rate  charters  granted  at  different  times  between  1823 
and  1865  or  1871.  They  each  had  the  right  to  use  the  streets  of  certain 
portions  of  the  city  for  the  purpose  of  laying  mains  and  service  pipes 
in  order  to  furnish  gas.  Not  one  of  the  companies  had  ever  been  called 
upon  to  pay  for  such  privilege.  In  1884  authority  was  given  by  law  to 
consolidate  these  corporations  upon  conditions  named  in  the  act,  which 
specified,  among  other  things,  that  the  amount  of  capital  issued  should 
not  be  in  amount  more  "than  the  fair  aggregate  value  of  the  property, 
franchises  and  rights  of  the  several  companies  to  be  consolidated." 
A  legislative  committee  of  investigation  found  that  the  franchises  of  the 
merged  companies  were  reasonably  worth  $7,781,000  and  stock  to  this 
amount  was  included  in  the  total  issue.  The  court  held  that  the  public 
having  approved  the  consolidation  and  the  amount  of  securities  issued  on 
this  basis,  should  not  be  permitted  to  question  the  valuation  at  this  time 
and  therefore  accepted  the  valuation  fixed  under  the  act  of  1884  as 
conclusive,  but  did  not  permit  an  increase  in  franchise  value  since  the 
consolidation. 

The  consolidation  of  the  several  gas  companies  into  The  Peoples  Gas 
Light  &  Coke  Company  was  made  in  1897  under  state  authority  expressed 
in  the  Gas  Consolidation  Act.  As  explained  in  another  part  of  this 
report,  this  company  assumed  the  bonds  of  the  merged  companies  and 
issued  stock  to  the  amount  of  $25,000,000  which  was  subsequently  placed 
with  investors.  In  the  merging  of  these  companies  making  up  the 
present  consolidation,  some  of  which  themselves  represented  a  com- 
bination of  gas  companies,  there  were  included  those  expenditures  which 
had  been  incurred  in  purchasing  the  competing  plants,  the  cost  of  which 
had  been  charged  to  the  construction  or  plant  account  of  the  purchasing 
company.  This  account  contained,  through  these  acts,  heavy  charges 
for  duplicate  property  and  expenditures  for  franchises.  From  all  the 
data  which  can  be  obtained  concerning  plant  values  and  yearly  con- 
struction, it  is  doubtful  if  an  appraisal  of  the  property  embraced  in  the 
merger  of  1897,  including  overhead  charges  and  a  reasonable  discount 
on  securities,  would  have  shown  physical  value  in  excess  of  $27,000,000. 
It  is  clear  that  the  property  value  was  not  equal  to  the  bonded  (iebt 
assumed,  leaving  the  total  capital  stock  without  any  foundation  in 
tangible  property.  The  construction  account  on  December  31,  1897,  five 
months  after  the  merger,  showed  an  investment  of  $60,181,559,  against 


49 

which  there  were  outstanding  stocks  and  bonds  to  the  amount  of 
$59,246,000. 

It  will  be  observed  that  the  facts  in  this  case  are  somewhat  similar 
to  those  in  the  New  York  case  above  referred  to,  in  which  it  was  held 
that  a  reasonable  investment  value  in  the  franchises  was  created,  the 
extent  of  which  the  public  was  estopped  to  deny.  It  also  found  in  the 
same  act  of  estoppel  a  measure  of  value  for  the  property  in  excess  of 
the  physical  value.  In  this  valuation,  however,  neither  the  city  of 
Chicago  nor  the  State  of  Illinois  has  ever  by  agreement,  sanction  or 
acquiescence,  committed  any  act  which  would  estop  it  from  denying  the 
existence  of  franchise  value.  If  any  value  exists  in  this  case  over  and 
above  the  physical  value  it  must  be  founded  on  some  ground  other  than 
that  of  estoppel  to  deny  franchise  rights,  and  it  is  believed  that  such  a 
ground  exists.  The  value  in  this  case  is  founded  on  the  basis  of  cost. 
Since  for  all  practical  purposes  the  policy  of  the  city  compelled  the 
older  company  to  purchase  the  newly  organized  companies,  the  amount 
which  it  was  honestly  compelled  to  pay  represents  an  expenditure  which 
can  be  regarded  either  as  a  cost  of  extending  and  strengthening  the 
business  or  as  a  necessary  loss  in  maintaining  the  business.  In  either 
event  the  expenditure  must  be  met  by  the  investors  in  the  gas  business, 
and  since  the  public  compelled  this  act  which  increased  the  cost  of  the 
plant  it  should  in  all  fairness  be  estopped  from  denying  the  reasonable 
consequences  of  its  acts.  Where  an  expenditure  is  made  necessary  by 
an  act  of  the  public  which  increases  the  cost  of  the  plant,  or  adds  to  the 
operating  expenses  of  the  utility,  it  is  but  fair  that  the  city,  as  between 
the  investor  and  the  public,  should  bear  the  burden  of  such  costs.  The 
question  here  is  not  one  of  franchise  values  lout  of  costs  of  business. 
This  expenditure  is  not  intangible  property  in  the  sense  that  it  creates 
a  right  to  perform  a  specific  act,  although  it  is  intangible  to-day  in  that 
there  is  no  physical  property  in  existence  for  the  payment. 

That  such  present  value  is  difficult  to  determine  is  no  proof  of  its 
r^pnexistence.  While  it  can  not  be  computed  with  accuracy  it  can  be 
approximated.  It  may  safely  be  assumed  that  the  actual  plant  value  in 
1897,  when  the  present  company  came  into  existence,  was  not  in  excess 
of  the  amount  of  securities  issued.  In  fact,  it  is  known  that  the  physical 
plant  value  was  less  than  the  amount  of  the  bonds  assumed.  If  the 
value  of  the  stocks  and  bonds  at  the  date  of  consolidation  be  taken  as  the 
investment  value  of  the  property  an  injustice  would  be  done  to  the 
public,  since  the  balance  sheet  shows  the  par  value  of  the  securities 
which  it  is  known  exceeded  the  market  value  at  the  time  of  the  con- 
solidation, and  also  because  a  reduction  should  be  made  from  the  total 
for  what  appears  to  be  unreasonable  personal  profits  and  excessive  prices 
paid  in  the  transactions.  The  subject  of  valuation,  with  respect  to 
this  question,  has  been  carefully  analyzed  from  all  the  records  which 


50 

could  be  obtained,  and  it  is  believed  that  if  the  physical  value  of  sub- 
stantially $27,000,000  is  increased  by  an  amount  of  approximately 
$10,000,000  to  represent  the  intangible  value  due  to  the  necessary  invest- 
ment costs  and  an  allowance  be  made  for  working  capital,  the  fail- 
value  as  of  1897,  in  round  numbers,  should  be  $39,000,000,  instead  of  the 
amount  of  securities  shown  at  that  date.  With  this  amount  as  a  value  in 
1897  it  is  possible  to  compute  the  fair  tangible  and  intangible  value 
as  of  1909,  the  records  since  the  above  date  being  complete. 

The  court,  in  the  Consolidated  Gas  case  above  referred  to,  held  that 
the  intangible  value  there  allowed  and  which  the  city  was  estopped  to 
deny,  did  not  increase  with  the  growth  of  the  business.  Neither  is  there 
any  ground  for  believing,  under  the  reasoning  in  that  case,  that  the 
intangible  value  of  the  Peoples  Gas  Light  &  Coke  Company  has  increased 
because  of  the  great  increase  in  physical  value  since  1897.  The  question 
naturally  arises,  if  the  city  by  its  early  action  compelled  the  company  to 
increase  its  cost  of  plant,  which  must  be  allowed  as  part  of  the  investment, 
is  it  possible  by  any  subsequent  act  of  the  city  to  reduce  that  value? 
If  adverse  acts  of  the  city  result  in  investment  increases,  does  it  not 
logically  follow  that  any  acts  of  the  city  which  permit  a  return  over 
and  above  that  which  is  deemed  reasonable  on  a  fair  valuation  should, 
by  the  amount  of  such  excess,  be  applied  as  a  credit  to  the  investment  and 
thus  reduce  the  valuation  so  created  against  the  public  ?  Whether  there 
has  been  an  increase  or  reduction  of  the  going  value  under  this  theory 
must  be  determined  from  an  analysis  of  the  company's  records  since 
1897. 

The  disposition  of  the  franchise  value  may  be  summarized  by  the 
statement  that  franchises  are  property,  but  that  no  value  should  be 
allowed  as  against  the  public  in  rate  adjustments  except  to  the  extent  of 
the  price  paid  for  them  to  the  community.  Even  though  no  amount  be 
allowed  for  franchises  in  the  valuation  an  addition  must  be  made  to  the 
physical  value  to  the  amount  of  reasonable  costs  which  were  incurred 
due  to  the  municipal  policy  of  forced  competition  and  that  such  losses 
constitute  construction  charges  which  the  city  in  justice  is  estopped 
to  deny.  Since  the  public  is  to  be  charged  with  the  costs  incurred 
through  its  erroneous  policy  in  the  form  of  an  increased  investment,  the 
same  logic  requires  that  the  public  receive  the  benefit  through  a  credit 
to  such  intangible  investment  by  any  amount  which  the  company  may 
have  been  permitted  to  earn  since  1897  over  and  above  a  reasonable 
rate  of  return  on  the  investment  actually  made.  The  discussion  of 
the  subject  of  the  intangible  value  of  the  company's  property  as  affected 
during  the  last  thirteen  years  is  so  involved  with  the  subject  of  going 
value  that  digression  is  here  made  to  the  latter  subject. 

While  no  definition  of  the  term  is  entirely  satisfactory,  it  is  admitted 
by  authorities  that  the  ' '  going  value ' '  represents  an  element  of  value  due 


51 

to  the  company  in  question  being  a  live,  active,  operating  plant  instead 
of  a  bare  physical  mass  of  material.  Going  value  must  not  be  confused 
with  "good- will"  which  implies  the  exercise  of  choice  on  the  part  of 
the  customer  as  to  which  of  several  establishments  offer  the  best  induce- 
ments for  his  patronage.  Since  a  gas  utility  is  a  natural  monopoly 
there  can  be  no  room  for  selection  by  the  customer.  If  there  is  only  one 
establishment  which  can  supply  the  people,  there  is  no  "good-will" 
value  due  to  their  choice  to  take  its  product  or  subscribe  to  its  service. 
Every  one  will  agree,  however,  that  a  given  plant  having  a  valuation  of 
$50,000,000,  with  an  established  business  supplying  500,000  customers 
with  its  product,  is  worth  more  to  the  present  investor  and  to  the 
prospective  purchaser  than  is  the  same  plant  ready  to  serve  the  com- 
munity, but  with  no  customers  attached  for  service  and  its  business 
undeveloped.  Experience  shows  that  it  costs  a  great  deal  to  develop 
any  business.  The  early  years  of  nearly  every  business  are  beset  with 
many  serious  difficulties  which  not  infrequently  terminate  in  bank- 
ruptcy. The  problem  is  how  to  measure  the  value  of  such  an  established 
business  for  the  purpose  of  rate  adjustment. 

It  has  been  claimed  by  some,  and  also  advanced  in  this  valuation, 
that  if  the  going  value  of  a  company  represents  the  cost  of  developing 
its  business,  it  means  the  value  of  the  present  patronage  of  the  company. 
From  an  analysis  of  the  records  it  is  possible  to  obtain  an  accurate 
statement  of  the  cost  of  securing  a  customer.  If  the  company  in  ques- 
tion has  522,000  customers,  as  is  true  in  this  case,  the  going  value,  with 
the  assumed  cost  of  development  of  $30.00  per  customer,  would  mean  a 
value  of  $15,660,000.  Regardless  of  the  justice  or  injustice  of  this 
ainount  it  will  readily  be  seen  that  this  is  not  the  proper  measure  of 
going  value.  The  average  rate  per  customer  which  the  records  show 
will  be  an  average  over  recent  years  and  will  not  cover  the  entire  history 
of  the  company.  This  method  fails  to  give  information  as  to  the  cost 
of  development  at  the  time  when  development  is  a  real  problem  to  the 
company.  In  order  to  be  accurate  it  should  consider  the  cost  of  securing 
business  during  the  entire  history  of  the  company,  so  that  the  develop- 
ment expenses  as  determined  would  be  the  development  cost  of  this 
particular  plant  under  the  difficulties  which  confronted  it  at  different 
times.  It  is  generally  known  that  fifteen  or  twenty  years  ago  the  use 
of  gas  had  not  reached  the  stage  of  necessity  which  it  holds  to-day,  and 
that  it  required  more  argument,  solicitation  and  many  inducements  to 
secure  the  development  of  the  business.  This  method  of  arriving  at 
going  value  does  not,  therefore,  recognize  the  investment  which  the 
company  has  made  for  the  development  of  the  business. 

The  theory  in  this  case,  however,  that  of  reproduction  as  of  the 
time  of  the  investment,  must  recognize  that  gas  is  to-day  not  an 
unknown  quantity.  It  is  a  service  of  general  use.  It  does  not  require 


52 

so  large  an  expenditure  to  develop  the  gas  business  to-day  in  a  large 
city  as  was  needed  a  generation  ago.  Everybody  knows  the  value  of  gas 
for  heating  and  for  illumination.  There  is  always  a  certain  inertia  to 
be  overcome,  but  this  calls  for  less  expense  to-day  than  was  necessary 
years  ago.  Development  expenditures  must  be  incurred  even  to-day,  for 
every  utility  must  be  continuously  engaged  in  campaigns  of  education 
to  secure  the  widest  and  at  the  same  time  most  economical  use  of  gas. 
These  expenses  are  proper  operating  expenses  and  as  such  should  be 
included  in  the  expense  accpunts.  To  also  capitalize  them  would  mean 
the  duplication  of  expenses.  , 

If  the  reproduction  rule  means  the  cost  of  development  of  an  equal 
business  as  that  which  exists  to-day,  as  if,  to  be  more  clear,  the  present 
plant  passed  out  of  existence  and  its  customers  would  have  to  be 
solicited  to  use  gas  of  the  new  company  to  take  its  place,  it  must  be 
remembered  that  no  such  expense  for  development  would  be  required  as 
was  generally  necessary  years  ago,  or  as  was  actually  incurred  by  the 
company.  Reproduction  means  reproduction  now,  at  the  time  of  this 
investigation,  and  this  is  the  time  when  thousands  of  gas  users  are 
thoroughly  alive  to  the  advantages  of  gas  and  demand  its  widest  possible 
use.  These  customers,  as  a  rule,  are  not  seeking  education  to-day  on  the 
uses  of  gas.  The  general  demand  in  1910  and  1911  is  the  demand  for 
adequate  service  and  reasonable  rates.  Given  these  conditions  under 
the  reproduction  theory,  it  is  safe  to  assume  that  a  very  large  propor- 
tion of  the  present  customers  would  take  gas  from  the  company  without 
solicitation  or  any  demonstrations.  Some  would  require  visits  by  solici- 
tors to  induce  them  to  take  gas  from  the  new  proprietors  and  a  number 
probably  would  be  lost  entirely,  but  it  is  obvious  that  when  the  public 
has  become  accustomed  to  the  use  of  gas  as  under  present  conditions, 
the  cost  of  reproduction  would  apply  only  to  a  portion  of  the  present 
customers.  To  attempt  to  measure  going  value  by  applying  a  develop- 
ment cost  per  customer  to  the  entire  number  of  customers  is  therefore 
unjust,  not  only  because  it  does  not  recognize  the  losses  and  surplus 
profits  during  the  operation  of  the  business,  but  for  the  reason  that  a 
very  much  lower  rate  per  customer  should  be  used  than  the  average 
cost  of  development  shown  by  the  books. 

Another  basis  suggested  for  the  measuring  of  going  value  was  to 
allow  an  amount  equivalent  to  one  year's  gross  income.  This  suggestion 
has  the  merit  of  simplicity,  but  is  unsound  because  the  going  value  of 
the  company  as  of  to-day  has  no  definite  relation  to  the  gross  earnings. 
Going  value  has  no  reference  to  the  capitalization  of  the  plant  on  the 
basis  of  its  earning  capacity,  for  that  would  be  governed  largely  by  the 
present  rate  schedule,  which  may  be  too  high.  The  real  basis  of  the 
suggestion  is  that  in  a  number  of  plants  the  cost  of  developing  the 
business  has  been  found  upon  investigation  to  be  substantially  equal  to 


53 

the  gross  earnings  for  one  year.  In  this  instance  the  going  value,  fol- 
lowing this  method,  would  be  approximately  $15,500,000.  It  will  be 
seen  that  in  this  case  this  value  is  almost  the  same  as  what  would  be  the 
going  value  if  computed  on  a  cost  per  customer  basis.  It  would  appear 
that  the  similarity  of  the  two  figures  is  a  matter  of  accident  rather  than 
that  it  represents  substantially  the  measure  of  the  going  value.  The 
gross  earnings  of  to-day  give  no  information  as  to  the  cost  of  develop- 
ing the  business.  In  one  city  the  public  may  have  been  ready  for  the  gas 
utility  and  customers  were  easily  secured.  In  another  city  the  service 
may  have  been  in  advance  of  its  necessity  and  owing  to  the  cheapness  of 
other  fuel  and  illuminants  development  was  slow  and  expensive.  The 
gross  earnings  may  be  an  element  to  be  considered  in  arriving  at  the 
going  value  of  a  corporation,  but  can  hardly  be  accepted  as  a  true 
measure  of  it. 

Another  measure  for  determining  going  value,  one  which  has  served 
several  times  in  computing  the  intangible  worth  of  water-works 
plants  and  the  adoption  of  which  was  strongly  urged  by  the  engineers 
of  the  company  in  this  valuation,  is  based  upon  the  cost  of  reproducing 
the  business  of  the  corporation  under  conditions  of  to-day.  This  method 
assumes  that  an  investor  is  desirous  of  engaging  in  the  gas  business  in 
Chicago  and  has  in  his  possession  sufficient  capital  to  purchase  the  pres- 
ent plant.  Leaving  aside  for  the  sake  of  argument  the  question  of  fran- 
chise rights,  the  investor  must  decide  whether  to  purchase  the  existing 
plant  with  its  established  business,  or  to  construct  a  plant  of  sufficient 
capacity  and  develop  the  business  so  that  at  the  end  of  the  necessary 
construction  and  development  period  the  new  plant  will  have  overtaken 
the  present  plant  and  will  have  a  business  of  substantially  the  same  pro- 
portions as  that  of  the  present  going  concern.  This  method  aims  to  place 
a  value  upon  an  established  income  and  to  determine  whether  it  is  more 
economical  to  purchase  the  going  concern  with  its  established  business 
or  to  develop  the  business. 

This  method  is  of  course  purely  theoretical,  but  it  is  based  upon 
assumptions  founded  in  actual  practice  and  although  not  conclusive  it 
deserves  consideration.  The  length  of  time  required  to  build  a  plant  as 
large  as  that  needed  to  serve  Chicago,  the  actual  construction  and  over- 
head charges,  the  interest  rates  to  be  paid  during  construction,  the 
probable  date  when  gas  could  first  be  sold  and  the  increasing  output  each 
year  Avith  the  extension  of  the  plant  and  the  development  of  the  busi- 
ness are  matters  which  the  company's  engineers  believed  could  be  esti- 
mated with  a  considerable  degree  of  accuracy.  To  show  the  application 
of  this  reasoning  as  indicating  the  amount  of  going  value  several  tables 
were  submitted  showing  the  growth  of  the  existing  or  going  concern  and 
the  development  of  the  hypothetical  plant.  These  tables  are  herewith 
presented.  It  was  necessary  for  the  purpose  of  this  computation  to 


54 

assume  a  plant  value,  a  working  capital  and  a  going  value  for  the  plant 
now  in  operation.  The  operating  expenses,  taxes  and  depreciation 
requirements  were  taken  from  the  present  company's  accounts.  It  was 
further  necessary  to  assume  a  rate  of  increase  in  business  from  the  begin- 
ning of  the  period  covered  in  the  table  for  both  the  present  plant  and  the 
hypothetical  plant.  It  is  considered  that  the  hypothetical  plant  will  be 
built  as  rapidly  as  is  consistent  with  good  engineering  practice,  and  the 
financing  of  the  enterprise  will  be  on  the  most  favorable  basis  under 
present  conditions.  Construction,  it  is  assumed,  will  be  started  on 
January  1,  1911. 

In  the  tables  the  sum  of  $42,000,000,  exclusive  of  the  office-building 
investment,  was  taken  as  the  physical  value  of  the  plant  necessary  for 
the  manufacture,  distribution  and  sale  of  gas,  which  amount  was  appor- 
tioned over  the  principal  classes  of  divisions  of  property.  The  allowance 
for  working  capital  was  placed  at  $4,000,000  and  the  estimated  going 
value  of  the  present  plant  was  placed  at  $12,800,000,  showing  a  total 
investment  value  of  $58,800,000.  It  is  assumed  that  a  period  of  ten 
years  would  be  required  to  complete  the  plant  with  all  of  its  present 
facilities,  although  gas  would  be  supplied  to  some  customers  before  the 
end  of  the  second  year  and  each  year  to  an  increasing  number  as  the 
plant  was  extended  into  new  territory.  The  extensions  of  the  plant 
would  be  made  as  rapidly  as  possible  and  the  time  assumed  in  this 
instance  is  based  upon  the  best  available  records  of  continuous  con- 
struction in  large  undertakings  which  the  company  possessed.  The 
plant  would  naturally  be  built  so  as  to  supply  some  customers  at  the 
earliest  possible  date  and  efforts  would  be  centralized  to  complete  the 
plant  first  in  the  most  profitable  business  section.  Neighborhoods  would 
be  canvassed  in  advance  of  actual  construction,  so  that  the  plant  would 
be  self-sustaining  as  soon  as  possible,  or  at  least  earn  part  of  its  operating 
expenses. 

The  first  year,  it  is  assumed,  in  all  probability  would  be  given  over  to 
securing  franchises,  taking  out  incorporation  papers,  perfecting  the 
organization  of  the  corporation,  selecting  office  locations,  closing  con- 
tracts and  making  surveys.  Real  estate  would  be  acquired  early,  as 
shown  to  be  needed  by  the  surveys,  for  the  location  of  manufacturing 
stations,  holders  and  pumping  stations.  The  amount  allowed  for  real- 
estate  purchases  in  this  instance  has  been  based  upon  the  idea  that 
plants  would  be  constructed  simultaneously  in  the  different  divisions  of 
the  city.  Additional  land  would  be  purchased  the  second  year  and  the 
immediate  requirements  probably  completed  by  the  end  of  the  third 
year,  although  the  construction  of  mains,  services  and  meters  would 
continue  rapidly  throughout  the  entire  ten-year  period,  thus  extending 
the  service  into  new  territory  to  additional  customers  and  greatly  increas- 
ing the  output  to  near  capacity.  The  following  tables  show  the  computa- 
tions under  this  method  of  measuring  going  value. 


55 


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57 

The  figures  contained  in  these  tables  were  taken  largely  from  the 
company's  own  records,  although  certain  changes  were  made  after  con- 
ference with  its  engineers  and  additional  data  supplied  by  estimate.  It 
will  be  noted  that  the  value  of  the  physical  property  in  the  hypothetical 
plant  is  not  the  actual  physical  property  which  would  be  required  for 
the  assumed  output  at  the  end  of  the  period  of  development,  but  instead 
is  more  nearly  equal  to  the  value  of  the  property  of  the  present  plant  at 
the  beginning  of  the  period.  Since  whatever  construction  would  be 
necessary  during  the  development  period  must  be  added  to  both  the 
present  plant  and  the  hypothetical  plant  and  therefore  would  not  affect 
the  result,  the  amount  has  been  omitted  from  the  calculation. 

Beginning  with  a  total  investment  value  of  $58,800,000,  the  tables 
show  the  investment  to-day,  the  amount  of  the  total  available  capital 
not  used  in  the  enterprise  on  which  a  return  of  4  per  cent  is  assumed, 
and  that  amount  which  is  withdrawn  for  construction  during  the  year  on 
which  2  per  cent  is  allowed  for  one-half  the  period,  or  its  equivalent  of 
1  per  cent  on  the  amount  withdrawn  for  the  entire  period.  The  income 
from  sales  of  gas  is  placed  at  85  cents  per  thousand,  which  is  the  present 
rate.  The  operating  expenses  during  the  first  three  years  would  natu- 
rally be  somewhat  higher  per  thousand  cubic  feet  than  for  the  same 
years  in  the  present  plant.  Particularly  during  the  first  years  it  is 
unlikely  that  the  plant  would  be  operated  at  capacity.  The  machinery 
would  be  new  and  require  frequent  adjustment  and  operators  would  have 
to  be  trained  in  their  duties.  It  is  assumed  in  the  tables  that  the  hypo- 
thetical plant  would  be  placed  in  operation  September  1,  1912,  and  that 
for  the  four  months  of  that  year  the  operating  expenses  would  be  65 
cents  $er  thousand.  During  the  second  year  a  cost  of  55  cents  is 
assumed,  50  cents  for  the  third  year  and  48%  cents  per  thousand  for 
the  remaining  years,  which  last  rate  is  that  shown  by  the  company's 
books  at  present.  Depreciation  and  tax  estimates  are  based  on  the  prop- 
erty in  use  for  the  given  year  and  reach  at  the  end  of  the  period  sub- 
stantially the  same  figures  as  those  in  the  going  plant.  By  adding  the 
interest  from  the  unemployed  capital  to  the  net  income  from  operation 
for  the  year  the  table  shows  the  total  income  for  the  period,  the  present 
worth  of  which  is  determined  on  a  5  per  cent  basis.  The  difference 
between  the  income  of  the  going  concern  and  the  income  of  the  hypo- 
thetical plant  for  the  same  year  shows  what  going  value  has  accumu- 
lated. The  sum  of  these  yearly  accumulations  amounts  to  $12,935,000, 
as  against  the  assumed  going  value  of  the  present  plant  of  $12.800,000. 
It  would  appear  therefore  from  the  tables  that  the  correct  value  was 
somewhere  between  these  two  amounts. 

This  method,  while  it  arrives  at  a  going  value  which  does  not  appear 
to  be  very  unreasonable,  is  open  to  criticism  and  apparently  the  greatest 
reliance  can  not  be  placed  upon  the  result  in  this  case.  While  no  single 


58 

formula  can  ba  followed  to  show  exactly  what  constitutes  the  proper 
allowance  for  this  purpose,  it  is  believed  that  on  broad  principles  of 
justice  a  consideration  of  both  profits  and  losses  should  be  recognized. 
There  is  no  such  recognition  in  this  method.  Neither  does  this  method 
recognize  the  rapidity  with  which  the  business  of  the  company  was  actu- 
ally developed,  nor  any  extraordinary  expenditures  or  changed  condi- 
tions, such  as  those  due  to  competition  or  unfavorable  legislation,  either 
municipal  or  state.  The  conclusion  is  arrived  at  almost  entirely  on  a 
basis  of  assumptions  which  are  largely  independent  of  local  conditions 
confronting  the  property  at  present,  or  under  which  it  was  developed 
in  the  past.  The  calculations  begin  by  assuming  that  which  it  is  sought 
to  prove,  and  the  correctness  of  the  computations  lies  in  arriving  at  a 
final  value  which  justifies  the  original  estimate.  The  result  is  also 
affected  by  the  amount  assumed  to  represent  the  present  physical  value. 
If  such  value  is  high  the  going  value  arrived  at  will  be  reduced.  In 
justice  to  this  method  it  should  be  said  that  an  extensive  investigation 
of  the  company's  records  would  show  information  and  units  more  nearly 
correct  than  the  assumptions  which  were  used.  It  should  also  be  stated 
that  somewhat  different  figures  instead  of  those  assumed  would  not 
greatly  affect  the  result,  since  they  would  apply  equally  to  both  proper- 
ties. The  real  purpose  of  this  table  is  to  show  the  cost  of  developing  the 
business,  a  calculation  which,  if  used  as  the  basis  of  valuation,  should 
take  into  consideration  other  factors  than  those  embraced  here.  While 
its  application  under  certain  conditions  may  lead  to  correct  values,  at 
which  times  it  may  be  the  best  of  the  several  methods  available,  it  is  no 
more  likely  to  give  correct  results  under  specific  local  conditions  than  is 
the  application  of  average  cost  units  to  result  in  a  correct  physical  value 
in  a  particular  appraisal.  This  method  of  arriving  at  going  value  pos- 
sesses some  merit  and  like  those  previously  discussed  was  considered  in 
arriving  at  the  final  amount,  but  it  is  not  sufficiently  proof  against  criti- 
cism to  warrant  the  adoption  of  its  results  without  additional  data. 

Whatever  single  method  should  be  followed  for  determining  going 
value,  if  there  is  such  a  correct  method,  it  is  believed  that  the  final  cal- 
culation should  be  tempered  with  a  consideration  of  fairness  to  all  inter- 
ests. The  amount  involved  representing  many  millions  of  dollars  and 
the  effect  on  the  final  rate  schedule  both  as  regards  the  investor  and  the 
public  requires  that  consideration  be  given  to  equity  as  well  as  to  mathe- 
matics. A  high  going  value  means  a  large  investment  upon  which  returns 
must  be  allowed  and  this  requires  a  high  gas  rate ;  a  low  going  value,  or 
no  allowance  for  going  value  at  all,  means  a  smaller  interest  requirement 
and  consequently  permits  a  low  rate  for  gas.  It  is  therefore  possible  to 
secure  a  very  low  gas  rate  if  the  value  of  the  plant  is  placed  sufficiently 
low,  but  court  decisions  are  firm  in  defining  particular  elements  of  value. 
Capital  does  not  obey  the  mandate  of  public  or  private  opinion  unless 


59 

such  opinion  is  founded  in  justice  and  sound  economics.  To  be  correct 
in  the  final  analysis  the  valuation  arrived  at  must  recognize  the  clear 
rights  of  capital  invested  in  public  enterprises,  but  it  must  not  lose  sight 
of  the  rights  of  the  public.  There  is  no  question  but  what  corporations 
engaged  in  public  service  are  by  virtue  of  their  character  invested  with 
valuable  rights  and  privileges  and  in  return  charged  with  well-defined 
duties.  The  public,  by  virtue  of  whose  grant  these  corporations  exist,  is 
entitled  to  the  proper  discharge  of  their  duties  and  likewise  owes  certain 
obligations.  In  most  instances  these  duties  and  obligations  are  clearly 
defined  by  the  courts.  In  some  instances  where  the  decisions  are  indefi- 
nite, or  the  subject  has  not  been  adjudicated,  political  economy  supplies 
what  the  law  omits.  Where  the  courts  have  defined  the  basis  of  valua- 
tion with  respect  to  the  different  classes  of  property  the  allowances  in 
this  report  have  followed  such  cases.  Where  the  law  is  not  definitely 
settled  mooted  questions  of  valuation  have  been  decided  upon  a  basis 
which  appeared  reasonable  and  just  in  the  premises.  With  these  prin- 
ciples in  mind  it  is  believed  that  the  going  value  of  the  Peoples  Gas 
Light  &  Coke  Company  can  best  be  determined  from  its  own  records 
and  history. 

A  public  service  corporation  is  entitled  both  by  common  law  and  by 
statute  to  a  reasonable  return  upon  its  investment.  If  a  given  rate 
schedule  yields  more  than  a  reasonable  return  to  the  investor  it  is  an 
injustice  to  the  public  and  the  rates  should  be  lowered.  If  the  rates  fail 
to  produce  sufficient  revenue  the  investor  is  not  receiving  that  return 
to  which  he  is  entitled  by  law.  If  he  has  received  a  reasonable  return 
each  year  on  his  investment  from  the  beginning  of  the  enterprise  justice 
would  seem  to  be  satisfied,  at  least  as  against  the  public,  without  allow- 
ing any  increase  in  the  value  of  the  property  which  produced  that  income 
to  represent  going  value.  If  the  investor  has  failed  to  receive  each  year 
that  amount  which  constitutes  a  reasonable  return  he  should  be  permit- 
ted to  charge  rates  sufficiently  high  to  reimburse  him  for  early  losses,  or 
such  losses  should  be  considered  as  costs  of  developing  the  business  and 
their  addition  to  the  value  of  the  physical  property  permitted.  Such 
additions,  from  an  equitable  standpoint  at  least,  may  be  said  to  consti- 
tute the  correct  going  value  of  a  public  service  corporation.  The  applica- 
tion of  this  doctrine  to  the  facts  in  this  city  and  the  logic  upon  which 
it  is  founded  is  shown  in  the  following  discussion. 

New  plants  seldom  yield  a  return  on  the  investment  during  the  first 
year  of  operation.  In  fact,  it  is  more  likely  to  require  a  number  of  years 
of  continuous  effort  to  establish  a  business  on  a  firm  basis,  while  the 
history  of  the  gas  industry  clearly  shows  that  many  of  such  plants  have 
not  reached  a  position  of  profit  to  the  investor  until  many  years  after 
their  construction.  During  the  earlier  years  a  large  amount  of  money 
is  required  for  development  purposes.  Where  a  corporation  is  in  posses- 


60 

sion  of  adequate  capital,  expenditures  of  this  character  can  be  made 
without  serious  loss  to  the  stockholders,  but  where,  as  is  almost  univer- 
sally the  case,  the  business  is  developed  out  of  the  earnings  at  the  expense 
of  interest  and  dividend  payments,  a  deficit  will  result.  When  a  cor- 
poration is  earning  less  than  its  operating  expenses,  interest  and  depre- 
ciation, it  is  absolutely  necessary  that  the  stockholders  make  further 
payments  for  development  purposes.  Where  a  small  surplus  is  earned, 
such  amount  may  be  used  for  development  purposes,  but  it  is  at  the 
expense  of  the  stockholders '  rights  unless  such  development  requirements 
are  recognized  in  the  capital.  If  the  development  cost  is  not  met  out  of 
the  earnings  it  must  be  met  directly  by  the  sale  of  securities,  which 
becomes  a  liability  against  the  plant. 

The  amount  by  which  the  earnings  fail  to  meet  the  operating  expenses 
and  the  return  on  the  investment  creates  deficits  which  constitute  the 
cost  of  building  up  the  business.  Just  as  supervision,  interest  and  insur- 
ance during  construction  are  expenditures  to  be  added  to  the  construc- 
tion cost  of  the  plant,  so  the  deficits  representing  the  amounts  by  which 
the  stockholders  have  failed  to  receive  their  reasonable  return  are  costs 
to  be  added  to  the  value  of  the  physical  plant  in  order  to  show  the  com- 
plete investment  which  has  been  made  in  the  industry  as  a  live,  going 
concern. 

The  cost  of  developing  a  gas  industry  consists  of  expenditures  for 
advertising,  soliciting,  demonstrating,  the  sale  of  appliances  at  less  than 
cost,  free  house  piping,  and,  in  some  instances,  free  gas  for  a  limited 
period.  Concessions  in  rates  below  actual  cost  are  also  given  to  stimulate 
a  large  and  general  us,e  of  gas.  Development  expenditures  may  further 
be  increased  through  the  failure  of  the  plant  to  earn  even  its  current 
operating  charges  for  a  number  of  years,  when  the  stockholders  must 
supply  additional  capital  to  keep  the  plant  in  operation.  Such  expendi- 
tures are  additional  investments  upon  which  the  stockholder  is  entitled 
to  a  return  as  well  as  upon  expenditures  for  physical  plant.  The  investor 
has  a  right  to  expect  reimbursement  for  such  losses.  They  are  legitimate 
costs  of  business.  The  public  has  a  right  to  exclude  from  the  valuation 
of  utility  properties  upon  which  it  is  compelled  to  pay  reasonable  returns 
all  amounts  representing  unnecessary  expenditures,  excessive  discounts 
on  securities,  promotion  fees,  expenditures  due  to  poor  management  and 
extravagance  and  errors  of  judgment  which  the  exercise  of  reasonable 
care  and  foresight  might  have  avoided.  It,  however,  can  not  avoid  pay- 
ments on  a  valuation  consisting  of  necessary  expenditures  honestly  made, 
and  the  cost  of  operating  the  plant  until  it  reaches  the  point  where  it 
returns  the  reasonable  interest  to  which  the  investor  is  entitled  by  law. 
The  cost  of  securing  a  paying  business  can  best  be  computed  from  a  cost 
analysis  of  the  annual  surplus  and  deficit  shown  by  the  records. 

Capital  is  not  unmindful  of  the  uncertainties  of  business  development. 


61 

Money  seeks  the  avenue  of  greatest  returns  consistent  with  security  and 
stability.  A  return  of  5  or  6  per  cent  in  a  safe  investment  will  attract 
capital,  while  a  10  per  cent  return  which  is  accompanied  with  a  consid- 
erable element  of  risk  will  find  little  encouragement.  If,  however,  the 
return  which  is  considered  reasonable  in  any  instance  in  view  of  the  risks 
inherent  in  the  venture,  can  not  be  secured  until  several  or  many  years 
from  the  date  of  the  original  investment,  and  additional  capital  must  be 
provided  in  the  meantime  upon  which  no  return  will  be  allowed,  utility 
development  will  be  retarded  and,  in  some  instances,  it  will  be  indefi- 
nitely postponed.  To  prevent  the  progressive  development  of  business 
results  in  hardships  to  the  customers  and  to  the  public  generally  and 
would  tend  to  keep  operating  unit  costs  at  a  higher  level.  It  would  be 
unjust  to  the  stockholder  to  deny  him  a  return  upon  his  money  actually 
and  honestly  invested.  A  utility  has  no  legal  right  to  charge  more  than 
a  reasonable  rate,  and  if  this  is  not  to  be  computed  on  the  development 
of  the  business  and  unavoidable  losses,  as  well  as  on  the  investment  in 
physical  property,  the  reasonable  rate  allowed  in  after  years  when  the 
industry  has  reached  a  stable  basis  will  not  be  a  reasonable  rate  on  the 
amount  actually  invested.  Losses  need  not  be  considered  in  the  valuation, 
provided  a  rate  of  return  is  permitted  which  includes  an  allowance  over 
and  above  the  rate  deemed  reasonable,  which  will  serve  to  reimburse  the 
stockholder  for  his  early  losses.  It  necessarily  follows  that  where  the 
rate  for  service  must  be  reasonable,  and  as  such  is  subject  to  regulation 
by  law,  the  early  losses  must  be  regarded  as  a  part  of  the  investment  until 
restored  to  the  stockholder  by  means  of  a  higher  rate  of  return  on  his 
investment.  Equity  admits  of  no  other  disposition. 

As  an  offset  in  favor  of  the  public,  equity  requires  that  if  the  deficits 
incurred  in  building  up  the  business  are  to  be  regarded  as  a  part  of  the 
investment,  any  surplus  earnings,  over  and  above  a  reasonable  return 
on  the  legitimate  investment,  should  also  be  taken  into  consideration.  If 
the  utility  has  earned  in  its  later  years  a  large  profit  because  of  favorable 
rate  schedules,  this  excess  above  a  reasonable  return  should  be  considered 
as  a  reimbursement  for  some  of  the  early  losses.  The  rule  of  justice 
should  work  in  both  directions. 

This  manner  of  arriving  at  the  fair  present  investment  value  to  be 
used  as  the  basis  of  rate  adjustment  was  suggested  by  the  court  in  the 
case  of  Mo.,  Kan.  &  Tex.  Ry.  Co.  v.  Love  (177  Fed.  493,  496)  as  follows: 

An  established  railroad  system  may  be  worth  more  than  its 
original  cost  and  more  than  the  mere  cost  of  its  physical  repro- 
duction. It  has  passed  the  initial  period  of  little  or  no  return 
to  its  owners  which,  of  greater  or  less  duration,  almost  always 
follows  construction,  and  is  not  infrequently  marked  by  de- 
fault and  bankruptcy.  The  inevitable  errors  in  its  building 
which  finite  minds  and  hands  can  not  avoid  have  been  measur- 
ably corrected,  time  and  effort  have  produced  a  commercial 


62 

adjustment  between  it  and  the  country  it  was  intended  to 
serve,  relations  have  been  established  with  patrons,  and 
sources  of  traffic  have  been  opened  up  and  made  tributary.  In 
other  words,  the  railroad,  unlike  one  newly  constructed,  is 
fully  equipped  and  is  doing  business  as  a  going  concern.  It 
has  attained  a  position  after  many  experiences  common  to 
railroad  enterprises  which  entail  loss  and  cost  not  paid  from 
current  earnings,  and  which  correspondingly  make  for  value. 

This  method  was  perfected  and  extensively  applied  by  the  Railroad 
Commission  of  Wisconsin  in  the  leading  utility  rate  cases  which  have 
come  before  that  body.  The  rule  was  stated  in  Hill,  et  al,  v.  Antigo 
Water  Company  (3  W.  B.  R.  C.,  623),  as  follows: 

In  other  words,  the  plant  was  losing  money  while  it  devel- 
oped its  business.  These  losses  or  deficits  had  to  be  met  by  the 
owners  and  may  be  said  to  constitute  the  additional  investment 
necessary  to  build  up  the  business.  These  deficits  therefore 
represent  the  cost  of  the  business  in  very  much  the  same  way 
as  that  in  which  the  cost  of  construction  represents  the  cost 
of  the  physical  plant.  In  fact,  the  one  appears  to  be  as  legit- 
imate and  necessary  a  part  of  the  cost  of  the  enterprise  as  a 
whole  as  the  other,  or  of  that  cost  upon  which  a  reasonable 
amount  for  interest  and  profits  should  be  earned.  This 
appears  to  hold  good  at  least  until  the  deficits  or  the  invest- 
ments occasioned  by  them  have  been  made  good  and  restored 
to  the  investors,  either  through  surplus  profits  or  in  some 
other  form.  Such  treatment  of  the  cost  of  building  up  the 
business  is  equitable  as  between  the  investors  and  the  con- 
sumers in  this  case.  In  the  long  run  such  treatment  or  its 
equivalent  to  the  investor  is  also  necessary  in  undertakings  of 
this  character  in  order  to  obtain  the  capital  that  is  required. 

The  same  principle  was  adhered  to  in  re  Investigation  of  Menom- 
onie  and  Marinette  Light  and  Traction  Company  (3  W.  R.  R.  C.,  778), 
and  in  the  case  of  State  Journal  Printing  Company  vs  Madison  Gas  & 
Electric  Company  (4  W.  R.  R.  C.,  501). 

The  logic  of  this  reasoning  has  recently  been  approved  by  the  Supreme 
Court  of  the  State  of  Oklahoma  in  the  case  of  the  Pioneer  Telephone  and 
Telegraph  Company  v.  Westenhaver,  in  the  following  language : 

FCAV  industries,  if  any,  .  .  .  can  be  made  self-sustaining 
from  the  first  day  of  their  operation.  The  uncontradicted 
evidence  in  this  case  discloses  that  appellant's  plant  for  the 
years  preceding  the  first  hearing,  failed  to  produce  revenue 
sufficient  for  operating  expenses,  current  repair  and  lay  aside 
an  amount  for  depreciation.  During  the  time  of  development 
there  is  a  loss  of  money  actually  expended  and  of  dividends 
upon  the  property  invested.  How  shall  this  be  taken  care  of  \ 
Must  it  be  borne  by  the  owners  of  the  plant  ?  Or  by  the  initial 
customer?  Or  shall  it  be  treated  as  a  part  of  the  investment 
or  value  of  the  plant  constituting  the  basis  upon  which  charges 


63 

shall  be  made  to  all  customers  who  receive  the  benefits  from 
the  increased  service  rendering  power  of  the  plant  by  reason 
of  these  expenditures?  It  seems  that  the  last  solution  is  the 
logical,  just  and  correct  one.  If  rates  were  to  be  charged  from 
the  beginning  so  as  to  cover  these  expenditures  and  earn  a 
dividend  from  the  time  the  plant  is  first  operated,  the  rate  to 
the  first  customers  would  be  in  many  instances,  if  not  in  all, 
so  exhorbitant  as  to  be  prohibitive  and  would  be  so  at  the  time 
when  the  plant  could  be  of  least  service  to  them.  On  the  other 
hand,  the  public  can  not  expect  as  a  business  proposition  or 
demand  as  a  legal  right  that  this  loss  shall  be  borne  by  him 
who  furnishes  the  service ;  for,  investors  in  public-service 
property  make  such  investments  for  the  return  they  will  yield ; 
and,  if  the  law  required  that  a  portion  of  the  investment  shall 
never  yield  any  return,  but  shall  be  a  total  loss  to  the  investor, 
capital  would  unwillingly  be  placed  into  such  class  of  invest- 
ments ;  but  the  law,  in  our  opinion,  does  not  so  require.  Pri- 
vate property  can  no  more  be  taken  in  this  method  for  public 
use  without  compensation,  than  by  any  other  method.  When 
the  use  of  the  property  and  the  expenditures  made  during  the 
nonexpense  paying  and  nondividend  paying  period  of  the 
plant  are  treated  as  an  element  of  the  value  of  the  property 
upon  which  fair  returns  shall  be  allowed,  then  the  burden  is 
distributed  among  those  who  receive  the  benefits  of  the  expen- 
ditures and  the  use  of  the  property  in  its  enhanced  value. 

The  above  method  of  computing  the  going  value  and  the  derivation 
of  the  final  investment  value  has  been  described  at  length  because  of  the 
reliance  placed  upon  the  conclusions  which  it  shows.  It  is  believed  to  be 
the  most  equitable  solution  of  the  problem  of  going  value,  since  by  this 
means  the  investor  is  protected  in  the  development  of  the  business,  and 
the  public  is  insured  against  the  dangers  of  excessive  valuations.  This 
method  of  computation  is  not  advanced  as  being  infallible.  On  the  con- 
trary, there  are  many  cases  where  this  reasoning  could  not  properly 
apply,  either  because  of  specific  conditions  or  the  absence  of  financial  data 
covering  many  years  of  operation.  If  every  yaluation  could  be  solved  by 
the  application  of  a  single  rule,  rate  adjustments  would  be  simple  indeed. 
At  no  time  can  the  exercise  of  judgment  be  entirely  eliminated.  Each 
case  must  be  analyzed  on  its  own  peculiar  facts.  In  this  particular  case 
this  method  of  reasoning  is  believed  to  be  proper. 

Reverting  to  the  discussion  of  franchise  values  and  the  cost  incurred 
by  the  company  in  developing  its  business  and  the  expense  due  to  the 
purchasing  of  competing  plants,  it  was  found  that  the  fair  value  of  the 
plant  in  1897,  including  physical  valuation,  working  capital  and  the 
going  value,  was  approximately  $39,000,000.  By  applying  the  above  rea- 
soning to  this  valuation  and  by  an  analysis  of  the  company's  profits  and 
losses  since  1897,  it  is  possible  to  determine  the  fair  investment  value  of 
the  plant  at  the  end  of  any  subsequent  year.  This  computation  is  shown 


64 

by  a  progressive  statistical  analysis  based  on  the  company's  records  and 
embraced  in  the  accompanying  table. 

The  table  begins  with  the  valuation  of  $39,000,000,  this  value  includ- 
ing, as  above  stated,  the  physical  value,  the  working  capital  and  the 
allowance  for  going  value.  Seven  per  cent  is  deemed  to  be  a  reasonable 
rate  of  return  at  the  present  time,  but  in  the  historical  treatment  of  this 
subject,  an  income  rate  must  be  used  which  is  reasonable,  not  so  much 
under  present  conditions  but  reasonable  for  the  year  when  it  is  used.  If 
seven  per  cent  is  reasonable  to-day,  it  is  believed  that  eight  per  cent  was 
reasonable  some  years  ago.  The  table  is,  therefore,  based  upon  a  rate  of 
return  of  eight  per  cent  for  the  years  from  1898  to  1906,  inclusive,  and 
a  rate  of  seven  per  cent  since  that  date.  The  yearly  requirements  under 
these  rates  are  shown  in  the  second  column.  Column  three  shows  the 
additions  to  the  physical  property  and  to  the  working  capital,  and  in  the 
following  column  is  shown  the  annual  requirements  for  earnings  on  these 
additions.  Since  the  additions  are  extended  over  a  period  of  twelve 
months,  the  interest  rate  is  applied  only  for  six  months,  or  one-half  of 
the  time,  since  very  little  construction  wras  completed  during  the  first 
month  and  practically  all  of  the  investment  of  this  character  was  com- 
pleted in  the  twelfth  month.  The  next  column  shows  the  necessary 
operating  expenses,  including  depreciation.  The  next  column  shows  the 
total  of  the  foregoing  columns,  which  is  the  total  amount  which  the  stock- 
holders put  into  the  business  during  the  year,  or  which  they  would  have 
put  into  it  if  the  earnings  would  permit,  and  if  the  earnings  were  insuffi- 
cient indicates  the  amount  of  losses  which  accrued.  Against  this  total 
there  is  shown  in  the  next  column  the  gross  earnings,  or  the  amount 
which  the  stockholders  took  out  of  the  business.  The  deduction  of  those 
earnings  from  the  total  cost  contained  in  the  preceding  column  shows  in 
the  last  column  the  cost  of  the  plant,  or  its  investment  value  at  the  close 
of  the  year.  According  to  this  table,  the  investment  on  which  the  stock- 
holder is  entitled  to  a.  reasonable  return  is  equal  to  $60,933,630.  There 
should  be  added  to  this  total  the  amount  of  $916,249,  representing  con- 
struction work  practically  completed  and  partly  in  service  but  tech- 
nically not  yet  turned  over  to  the  company,  and  for  which  payment  will 
not  be  made  until  final  certification  from  architects  as  to  the  compliance 
with  all  specifications.  With  these  adjustments,  the  investment  value  of 
the  entire  property  of  the  company  may  be  said  to  be  $61,849,879. 

The  following  table  contains  the  data  above  outlined : 


65 


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66 


PAVING. 

Although  strongly  argued  by  the  company,  no  allowance  has  been 
made  in  the  above  total  to  cover  the  value  of  the  pavement  over  the 
company's  distribution  system.  It  was  claimed  that  since  the  valuation 
for  the  purpose  of  this  investigation  must  be  the  reproduction  cost,  the 
company  should  be  given  credit  for  the  value  of  the  street  pavement 
over  all  of  its  mains  and  services,  even  though  the  company  paid  no  part 
of  the  cost  of  such  pavement,  since  if  the  plant  were  to  be  reproduced 
as  of  this  date  it  would  be  necessary  to  cut  through  such  pavement  for 
the  purpose  of  laying  the  pipes.  The  facts  show  that  on  most  of  the 
streets  the  mains  were  put  down  before  any  pavement  was  laid  by  the 
city,  and  in  many  other  streets  the  mains  were  laid  at  a  time  when  the 
city  was  replacing  the  pavement,  so  that  in  either  case  the  company  was 
put  to  no  expense  because  of  the  street  improvement.  Where,  however, 
the  company  did  cut  through  the  pavement  and  replace  it  as  required  by 
the  city  ordinance,  the  cost  thereof  has  been  added  to  the  cost  of  the 
mains  and  is  now  included  in  the  valuation  tables.  The  purpose  through- 
out the  appraisal  of  the  distribution  system  was  to  allow  a  valuation 
where  the  company  incurred  pavement  expenditures  and  to  exclude  any 
allowance  for  pavement  laid  and  paid  for  by  the  city. 

The  pavement  over  the  company's  present  distribution  system,  of 
which  the  street  mains  alone  are  nearly  2,600  miles  in  length,  is  rea- 
sonably worth  $6,000,000,  but  this  is  the  investment  of  the  people  of 
Chicago  and  not  the  investment  of  the  gas  company.  Even  if  the  repro- 
duction theory  is  to  be  carried  to  the  utmost  extent,  it  does  not  follow 
that  the  same  distribution  arrangement  would  be  followed  and  that  the 
same  number  of  pipes  would  be  placed  in  the  streets  as  they  exist  at 
present.  It  is  probable  that  much  of  the  distribution  system  would  be 
placed  in  alleys  and  parkways  where  the  construction  expense  would  be 
very  much  reduced.  If,  under  the  decisions  of  the  courts,  the  above 
amount,  together  with  the  additional  reproduction  cost  of  cutting  through 
all  the  pavement,  must  be  allowed  in  the  valuation,  the  investment  value 
and  the  interest  requirement  will  be  very  much  increased.  In  the  leading 
utility  rate  cases  the  court  has  failed  to  hold  specifically  that  the  value  of 
the  pavement  over  the  mains  not  paid  for  by  the  company  must  be 
included  in  the  plant  values.  In  all  such  cases  the  paving  item  was  very 
large,  and  if  it  were  intended  to  include  it  in  the  valuation,  it  is  reason- 
able to  assume  that  the  courts  would  have  so  stated.  On  the  other  hand, 
to  exclude  such  pavement  valuation  has  received  the  endorsement  of  the 
federal  court  and  public  service  commissions.  Every  legitimate  expendi- 
ture in  adapting  the  utility  to  the  demands  of  progress  and  community 
growth  is  a  proper  charge  to  construction,  and  as  such  the  investment 
therefor  is  entitled  to  participate  in  the  distribution  of  earnings  from 


67 

operation.  If  expenditures  for  pavement  are  incurred  by  the  utility  in 
response  to  assessments  levied  by  the  city  or  are  incurred  in  cutting 
through  the  pavement  for  construction  purposes,  these  are  proper  capital 
charges.  It  does  not  seem  reasonable,  however,  that  a  utility  should  be 
permitted  to  capitalize  expenses  for  municipal  betterments  in  which  it 
has  not  participated,  and  when  the  benefits  which  accrue  to  it  are  remote 
and  incidental.  To  do  so  would  be  to  compel  the  customers  for  utility 
service  to  pay  increased  rates  because  of  their  civic  progressiveness.  For 
the  above  reason  the  city's  expenditure  for  paving  the  streets  over  the 
company's  distribution  system  is  not  regarded  as  a  gas  company  invest- 
ment in  rate-adjustment  proceedings ;  regardless  of  the  value  which  may 
exist  in  a  commercial  sense  because  of  such  improvements.  To  include 
the  cost  of  cutting  through  such  an  amount  of  pavement  and  its  subse- 
quent replacement  would  seem  to  be  carrying  the  reproduction  cost 
theory  further  than  justice  warrants. 

VALUATION   CONCLUSIONS. 

The  above  detailed  analysis  leads  to  the  conclusion  that  the  invest- 
ment value  of  the  property  owned  by  The  Peoples  Gas  Light  &  Coke 
Company  at  the  close  of  1910  was  approximately  $61,849,879.  In  arriv- 
ing at  this  amount  no  allowance  has  been  included  for  the  value  of  the 
perpetual  franchise  or  for  the  value  of  the  pavement  placed  by  the  city 
over  the  company's  distribution  system.  The  above  total  includes  the 
value  of  all  the  physical  property,  both  that  used  and  useful  in  the  com- 
pany's business  and  the  commercial  holdings,  together  with  its  necessary 
working  capital  and  an  allowance  for  going  value  as  defined  in  this 
report. 

Since  the  purpose  of  this  inquiry  is  to  determine  a  reasonable  rate  for 
manufactured  gas,  it  is  necessary  to  apportion  such  investment  value 
over  the  utility  service  and  the  commercial  service.  The  utility  service 
at  present,  as  explained,  really  consists  of  two  distinct  services,  namely, 
the  sale  of  manufactured  gas,  the  heating  and  lighting  standard  of  which 
is  prescribed  by  ordinance  and  for  which  the  present  rate  is  85  cents  per 
thousand  cubic  feet,  and  the  sale  of  natural  gas  sold  in  a  restricted  area 
of  the  city  at  a  rate  of  50  cents  per  thousand  cubic  feet.  This  necessi- 
tated the  separation  of  the  utility  property  over  these  two  departments 
of  service.  The  general  office  building  and  the  real  estate  not  used  in  the 
gas  business  has  been  excluded  from  the  rate  analysis.  The  company 
occupies  only  a  portion  of  its  new  office  building,  the  remaining  space 
being  rented  for  commercial  purposes.  For  the  purpose  of  this  anaylsis 
it  is  optional  to  consider  a  portion  of  the  above  building  as  a  gas  invest- 
ment or  to  exclude  it  entirely  and  to  regard  it  as  a  commercial  invest- 
ment, at  the  same  time  making  a  charge  in  the  operating  expenses  for 
rent  based  on  the  space  now  occupied  by  the  company.  This  latter 


68 

alternative  has  been  adopted  and  the  cost  of  the  building  is,  therefore, 
excluded  from  the  investment  upon  which  the  gas  service  must  yield  a 
reasonable  return,  but  there  has  been  included  in  the  operating  expenses 
the  proper  rental  allowance.  Deducting  from  the  total  of  $61,849,879 
for  1910  the  office-building  investment,  the  commercial  property  and  the 
natural  gas  investment,  and  adjusting  the  total  for  the  end  of  1909,  the 
period  under  investigation,  the  amount  on  which  the  rate  of  return  must 
be  applied  in  the  computation  of  a  reasonable  rate  for  manufactured  gas 
is  $51,575,678. 

AUDIT. 

The  books  of  the  company  were  audited  for  the  year  1909,  the  period 
covered  by  this  investigation.  In  the  course  of  the  audit  the  general 
ledger  containing  all  the  accounts  which  appeared  on  the  company's  trial 
balance  was  analyzed  in  detail  and  checked  with  the  entries  as  appeared 
in  the  general  journal.  A  trial  balance  was  taken  showing  the  balances 
January  1,  1908,  the  total  charges  and  credits  appearing  on  the  ledger 
during  the  year  and  the  balance  as  of  December  31, 1909.  The  company's 
classification  of  accounts  is  very  elaborate,  making  possible  a  cost  anaylsis 
in  considerable  detail.  All  the  vouchers  and  supplementary  records  such 
as  invoices,  pay-rolls,  store  requisitions  and  work  orders,  covering  the 
disbursements  of  the  company  for  the  year  1909  were  submitted  in 
response  to  requests  made  and  were  carefully  examined. 

REVENUE. 

The  original  records  of  earnings  from  all  sources  were  checked  in 
detail.  The  record  of  receipts  from  the  sale  of  gas  was  carried  in  one 
hundred  and  four  customers'  ledgers  containing  over  half  a  million 
accounts.  It  was  impossible  to  check  each  of  these  volumes  in  the  brief 
time  allowed  and  with  the  facilities  available,  and  it  was  deemed  unneces- 
sary to  undertake  such  work.  Certain  parts  of  the  customers'  ledgers 
were  audited  in  detail  and  the  correctness  of  the  conclusions  verified  by 
various  checks  against  the  sales  and  the  plant  output.  In  all  instances 
the  records  were  found  complete  and  in  great  detail. 

The  revenue  items  appearing  on  the  general  books  are  as  follows : 

GasSales .  $13,663,168.01 

Tar  Sales 130,944.03 

Receipts  from  Pintsch  Company 132,579 . 10 

Penalties 167,462.09 

Interest 113,276.25 

Rentals 17,591 . 06 

Green  Street  Rentals 955 . 68 

Interest  on  Securities 2,500 . 00 

Arc  Lamp  Rentals 340,873 . 31 

Carbide 870.23 

Indiana  Natural  Gas  &  Oil  Company 40,172 . 18 

Miscellaneous  Revenue 11,704.57 

Total .  $14,622,096.51 


69 

The  first  and  largest  item  in  the  above  table  consists  of  the  following 
details : 

Cubic  Feet.  Amount. 

Private  Consumers. ..               15,804,066,517  $13,435,464.05 

City  Meters 43,606,200  36,969.79 

City  Lamps 230.966,918  196,321.89 

Private  Lamps 344,546  292.87 

Miscellaneous  Sales 80,000  68.00 


Gross  Sales  Gas. 16,079,064,181       $13,667,116.60 

Less  Adjustments 3,948 . 59 


Net  Revenue  from  Gas $13,633,168.01 

Since  the  object  of  this  investigation  is  to  ascertain  a  reasonable  rate 
for  gas,  it  is  necessary  to  apportion  the  earnings  so  as  to  show  the  propor- 
tion to  be  credited  directly  and  indirectly  to  the  gas  utility  department, 
and  the  amount  which  represents  income  from  outside  sources  or  com- 
mercial transactions  which  can  not  properly  be  applied  to  reduce  the  cost 
of  gas.  The  amount  so  eliminated  from  the  above  total  of  $14,622,096.51 
is  $240,353.44  and  consists  of  seven  separate  items. 

There  has  been  excluded  from  the  revenue  to  be  applied  to  the  gas 
utility  the  amount  received  from  the  Pintsch  Company.  This  income 
consists  of  rentals  paid  by  the  Pintsch  Company  for  the  use  of  a  part  of 
one  of  the  company's  stations.  The  amount  of  the  investment  of  The 
Peoples  Gas  Light  &  Coke  Company  which  has  been  leased  to  the  Pintsch 
Company  was  excluded  from  the  gas  utility  investment  as  not  being  used 
and  useful  in  that  service.  Since  the  investment  has  been  apportioned 
the  income  from  the  rental  of  the  excluded  portion  is  likewise  excluded 
from  the  earnings. 

The  total  amount  received  by  the  company  in  the  form  of  interest  is 
$113,276.25.  Practically  90  per  cent  of  this  total  consists  of  interest  on 
funds  deposited  in  banks,  a  large  part  of  which  represents  the  proceeds 
from  bond  sales  to  be  devoted  to  construction  purposes.  The  total  inter- 
est item  has  been  analyzed  so  as  to  determine  the  reasonable  income  from 
this  source  which  can  be  applied  as  a  credit  to  the  gas  utility.  Such 
analysis  suggested  the  exclusion  from  the  total  of  $63,276.25  as  being  an 
extraordinary  earning.  The  $50,000  retained  as  an  earning  agrees 
favorably  with  the  ordinary  income  from  this  source  as  shown  by  the 
records  over  a  number  of  years.  The  rental  received  from  the  Green 
street  property  has  been  excluded  because  such  property  is  not  devoted 
to  the  gas  industry  and  was  also  excluded  from  the  plant  valuation.  For 
like  reason,  the  interest  on  securities  to  the  amount  of  $2,500  was 
excluded.  The  receipt  of  $870.23  from  the  sale  of  carbide  is  a  strictly 
commercial  transaction  in  no  way  connected  with  the  gas  utility,  and  for 
this  reason  has  been  excluded.  There  has  further  been  deducted  from 


70 

the  total  earnings  the  amount  of  $40,172.18  received  from  the  Indiana 
Natural  Gas  &  Oil  Company. 

INDIANA    NATURAL    GAS    &    OIL    COMPANY. 

The  Indiana  Natural  Gas  &  Oil  Company  is  controlled  by  The  Peo- 
ples Gas  Light  &  Coke  Company.  It  owns  extensive  pipe  lines  and 
pumping  stations  in  Indiana,  its  pipe  lines  reaching  to  the  southeast 
limits  of  Chicago,  where  they  make  connection  with  the  mains  of  the 
controlling  company.  The  company  has  a  bonded  indebtedness  of 
$6,000,000,  which  is  a  first  lien  on  the  entire  property,  and  it  is  capital- 
ized at  $2,000,000,  all  of  which  is  deposited  with  the  Central  Trust  Com- 
pany of  New  York,  the  trustee,  as  additional  security  for  the  payment 
of  the  bonds.  When  such  indebtedness  is  paid  the  stock  is  to  become  the 
property  of  The  Peoples  Gas  Light  &  Coke  Company.  The  controlling 
company  under  the  charter  of  this  company,  is  now  engaged  in  the  dis- 
tribution and  sale  of  natural  gas  in  a  restricted  area  in  the  city  of  Chi- 
cago. It  keeps  all  the  accounts  and  records  for  the  natural  gas  depart- 
ment, renders  the  bills  for  such  service  and  collects  the  revenue.  Under 
the  natural  gas  franchise  The  Peoples  Gas  Light  &  Coke  Company  dis- 
tributes through  a  separate  set  of  mains  constructed  for  this  purpose 
approximately  2,000,000,000  cubic  feet  of  natural  gas  for  fuel  purposes. 
During  the  year  1909  the  controlling  company  purchased  approximately 
2,000,000,000  cubic  feet  of  coke-oven  gas,  which  was  transmitted  to  the 
One  Hundred  and  Tenth  street  station,  where  it  was  purified  and  dis- 
tributed, a  portion  of  it  being  mixed  with  the  water  gas  and  distributed 
through  the  manufactured  gas  mains,  while  about  400,000,000  cubic  feet 
was  mixed  with  the  natural  gas  and  distributed  through  the  natural  gas 
mains. 

The  total  earnings  from  the  sale  of  natural  gas  in  1909  after  making 
corrections  for  bad  debts  and  allowances  to  the  amount  of  $885.50  was 
$609,004.75.  Against  this  amount  there  was  charged  the  cost  of  the  coke- 
oven  gas  purchased  from  the  By-Product  Coke  Oven  Corporation,  the 
cost  of  purifying  such  gas  and  the  gross  earnings  tax  of  5  per  cent 
amounting  to  $30,417.69  paid  to  the  city  of  Chicago.  After  deducting- 
various  other  operating  charges,  there  was  remitted  to  the  Indiana 
Natural  Gas  &  Oil  Company  the  sum  of  $475,000,  leaving  a  credit  to  The 
Peoples  Gas  Light  &  Coke  Company  of  $40,172.18,  which  was  excluded 
from  the  revenue  statement  above. 

The  sale  of  natural  gas  being  a  service  distinct  and  apart  from  the 
manufacture,  distribution  and  sale  of  gas  for  illuminating  and  fuel  pur- 
poses under  the  present  85-cent  rate,  all  transactions  connected  with  the 
natural  gas  service  have  been  excluded  from  this  calculation.  The  value 
of  the  property  devoted  to  the  natural  gas  business  is  shown  in  the  tables 


71 

on  valuation.  In  order  that  the  manufactured  gas  department  or  service 
should  be  charged  only  with  those  expenses  which  it  incurs  and  credited 
with  the  earnings  from  the  sale  of  such  gas,  there  have  been  excluded  the 
earnings,  operating  expenses  and  investment  of  the  natural  gas  depart- 
ment. If  such  service  is  to  be  continued,  it  should  bear  all  the  direct  and 
indirect  expenses  which  it  incurs,  and  for  the  purpose  of  this  investiga- 
tion must  be  regarded  as  a  separate  service. 

APPORTIONMENT    OF    REVENUE. 

From  the  above  explanations,  the  revenues  of  the  company  for  the 
purpose  of  this  investigation  may  be  rearranged  and  stated  as  follows,  in 
which  form  they  are  entered  in  the  final  income  account : 

Operating  Revenue: 

Gas  Sales $13,663,168.01 

Tar  Sales 130,944.03 

Penalties 167,462.09 

Arc  Lamp  Rentals 340,873.31 


Total $14,302,447.44 

Non-operating  Utility  Revenue: 

Interest $50,000.00 

Rentals 17,591 .06 

Miscellaneous  Revenue 11,704. 57 


Total $79,295.63 

Commercial  and  Extraordinary  Revenue  Excluded: 

Receipts  from  Pintsch  Company $132,579. 10 

Interest 63,276 . 25 

Green  Street  Rentals 955 . 68 

Interest  on  Securities 2,500.00 

Carbide 870.23 

Indiana  Natural  Gas  &  Oil  Company 40,172. 18 


Total 240,353.44 


Total  Revenue,  as  per  Ledger $14,622,096 . 51 

OPERATING  EXPENSES. 

The  company 's  profit  and  loss  accounts  were  audited  and  each  account 
analyzed  in  detail,  ^hile  this  examination  particularly  covered  1909, 
attention  was  also  given  to  the  accounts  for  the  four  preceding  years  and 
for  1910,  in  order  to  ascertain  whether  1909  was  in  any  manner  an  abnor- 
mal year  from  the  standpoint  of  operation  or  whether  the  accounts  for 
that  period  contained  any  extraordinary  charges.  The  expenses  as 
shown  by  the  company's  books  consist  of  seven  classes  which  are  based 
upon  the  chronological  steps  in  the  manufacture,  distribution  and  sale 
of  its  products.  These  classes  and  the  total  charges  for  each  in  1909 
were  as  follows : 


72 

Manufacturing  Expense $3,601,058. 51 

Gas  Purchased  and  Allied  Expenses 747,156.81 

Distribution  Expense 1,367,810 . 05 

Commercial  Expense 57,569.60 

Office  Expense 701,683 . 94 

General  Expense 704,332. 73 

Annual  Fixed  Charges 4,329,381 . 36 

Total $11,508,993.00 

The  anaylsis  of  these  accounts  suggested  certain  adjustments  for 
rate-making  purposes,  and  a  detailed  study  was  therefore  made  of  each 
account  in  order  to  obtain  the  amount  which  constituted  a  correct  utility 
operating  charge  and  also  the  reasonableness  of  such  charges  for  the 
purposes  indicated.  As  outlined  above,  there  was  deducted  from  the 
classified  operating  expense  accounts  a  reasonable  proportion  for  the 
natural  gas  department,  and  also  all  maintenance  and  administrative 
charges  for  other  departments,  on  the  theory  that  each  department  should 
be  self-supporting.  Various  minor  adjustments  were  made  which  were 
more  in  the  nature  of  transfers  from  one  group  to  another  in  order  more 
clearly  to  show  the  correctness  of  departmental  costs  and  also  to  meet 
specific  operating  conditions.  The  distribution  of  a  number  of  expense 
items  over  construction,  operation  and  maintenance  was  also  changed 
with  a  small  reduction  resulting  in  operating  expenses.  There  were,  how- 
ever, several  changes  of  greater  importance  which  deserve  separate  dis- 
cussion. 

LEASE   RENTALS. 

The  Peoples  Gas  Light  &  Coke  Company  at  present  control,  through 
leases,  the  property  of  the  Ogden  Gas  Company  and  the  Universal  Gas 
Company.  These  plants  have  been  acquired  partly  for  the  purpose  of 
securing  their  productive  capacity  to  supplement  the  plants  now  owned, 
but  more  particularly  to  remove  competition  in  the  local  gas  field.  The 
rental  charge  under  these  leases  amounting  to  $580,000  annually  is  con- 
tained in  the  income  account  as  one  of  the  operating  expenses,  so  that 
the  reasonableness  of  such  amount  is  a  matter  calling  for  careful  con- 
sideration. Doubtless,  the  fact  that  these  plants  had  an  established  busi- 
ness and  were  in  a  position  to  extend  it  with  the  growth  of  the  city  and 
the  further  fact  that  they  were  able  to  compete  seriously  with  the  older 
company,  would  warrant  the  payment  of  a  rental  charge  somewhat  in 
excess  of  a  reasonable  return  on  the  fair  present  value  of  the  physical 
property.  But  these  facts  should  not  serve  as  a  means  for  paying  through 
the  operating  expenses  of  the  older  company  an  amount  in  excess  of  a 
fair  rental  when  all  such  elements  and  conditions  are  given  due  weight. 

No  appraisal  of  the  twTo  leased  properties  has  ever  been  made  and 
there  is  no  inventory  of  their  property  to  be  had.  The  cost  of  repro- 
duction must  be  determined  from  other  sources,  especially  from  such 
data  as  is  available  from  capacity  measurements  and  from  personal 


73 

inspections.  This  course  was  pursued  and  an  appraisal  was  made  from 
all  the  data  which  could  be  obtained.  The  Ogden  Gas  Company  property 
consists  of  a  gas  manufacturing  station  with  a  daily  capacity  of  approxi- 
mately 3,000,000  cubic  feet  and  somewhat  in  excess  of  77  miles  of  distri- 
bution mains.  The  Universal  Gas  Company  owns  a  large  manufacturing 
station  with  a  daily  capacity  of  nearly  12,000,000  cubic  feet  and  5% 
miles  of  distribution  mains.  By  applying  the  same  unit  costs  to  these 
properties  as  were  used  in  appraising  the  physical  property  of  the  lessee 
company,  a  valuation  was  placed  on  the  property  covered  by  the  two 
leases.  The  amount  deemed  a  reasonable  charge  for  the  use  of  this  prop- 
erty was  determined  from  an  allowance  sufficient  to  cover  those  operating 
expenditures  not  assumed  by  The  Peoples  Gas  Light  &  Coke  Company 
and  a  return  on  the  investment  amounting  in  total  to  $340,000  per  year. 
The  rental  allowance  in  the  income  account  has  consequently  been  reduced 
by  the  sum  of  $240,000. 

DEPRECIATION    CHARGE. 

The  provision  for  depreciation  is  a  proper  operating  expense  and 
allowance  must  be  made  for  such  a  charge  in  the  income  account.  Every 
public  utility  should  set  up  an  adequate  depreciation  reserve  to  provide 
against  the  wasting  of  assets,  charging  operating  expense  annually  or  at 
more  frequent  intervals  with  an  amount  representing  the  estimated 
depreciation  during  such  period  and  making  a  corresponding  credit  to 
the  depreciation  reserve.  Maintenance  charges  should  cover  only  the 
upkeep  of  the  property  or  the  current  ordinary  repairs,  renewals  and 
replacements  resulting  through  the  use  of  the  property  or  through  those 
casualties  which  are  incident  to  the  nature  of  the  operation  and  which 
expenditures  are  necessary  in  order  to  keep  up  the  productive  capacity 
of  the  plant  to  its  original  or  equivalent  state  of  efficiency.  When,  how- 
ever, through  wear  and  tear,  inadequacy,  obsolescence,  supersession  or 
public  requirements,  the  unit  of  equipment  becomes  economically  irre- 
parable the  uncurrent  or  extraordinary  repairs,  renewals  or  replace- 
ments made  necessary  should  be  charged  to  the  depreciation  reserve 
which  has  been  accumulated  for  this  purpose  through  charges  to  oper- 
ating expenses. 

To  determine  what  constitutes  a  proper  depreciation  charge  it  is 
first  necessary  to  compute  the  composite  life  of  the  plant.  The  length  of 
life  of  the  various  parts  of  a  gas  plant  vary  greatly.  Cast-iron  mains, 
for  example,  have  a  very  long  life,  while  wrought  iron  mains  and  serv- 
ices have  a  much  shorter  period  of  use.  Some  of  the  machinery  at  the 
station  may  be  used  for  fifty  years.  Other  portions  are  consumed 
through  use  in  less  than  ten  years.  The  depreciation  reserve  to  be  pro- 
vided must  be  such  an  amount  as  will  permit  of  the  replacement  of  each 


74 

item  of  equipment  when  such  step  becomes  necessary.  The  composite 
life  of  the  plant  must  be  determined  from  a  study  of  the  reasonable  life 
in  service  of  each  class  of  equipment.  The  gas  industry  is  relatively  old 
and  much  information  is  available  to  show  the  probable  life  of  the  differ- 
ent classes  of  property.  Since  the  depreciation  allowance  must  provide 
for  all  replacements,  the  adequacy  and  efficiency  of  the  equipment  must 
be  considered  as  well  as  the  actual  physical  life.  Not  all  the  property, 
however,  is  subject  to  depreciation.  Land  and  working  capital,  for 
example,  may  be  excluded  from  such  a  calculation  as  not  depreciating 
in  the  sense  in  which  that  term  is  here  used. 

The  life-table  which  was  used  as  a  basis  for  the  determination  of  the 
required  allowance  in  the  present  case  was  compiled  from  the  records  of 
manufacturers  and  utility  companies,  supplemented  by  the  opinions  and 
experience  of  those  brought  into  close  contact  with  equipment  of  this 
character  under  practical  operating  conditions.  Local  conditions  affect 
the  term  of  life  and  it  is  therefore  necessary  in  estimating  the  deprecia- 
tion to  modify  such  periods  to  correspond  with  the  conditions  known  to 
exist.  Where  output  affects  the  life  of  the  property  a  shorter  period 
must  be  used  if  the  apparatus  is  more  heavily  loaded  than  under  average 
conditions.  Climatic  and  soil  conditions  affect  the  life  of  the  property 
and  the  growth  of  the  business  may  render  it  necessary  to  substitute 
larger  types  of  equipment  before  the  normal  life  is  run.  It  is  also  neces- 
sary to  consider  the  skill  of  management  and  the  state  of  repair  in 
which  the  property  is  kept,  since  it  is  possible  through  proper  handling 
to  materially  lengthen  the  life  of  the  property  in  service.  In  preparing 
the  life-table  in  this  computation  those  various  factors  have  been  given 
due  weight  so  that  the  assumptions  used  are  deemed  to  be  conservative 
under  present  conditions  in  Chicago.  The  following  table  contains  the 
statistical  data  showing  the  calculation  of  the  composite  life  of  the  prop- 
erty in  question : 


75 


(M  (M  Ol  «>T^ 


-§    e 

as  S 

H'~^ 


00 


(M  CO  CO  »O  t>- 


'^fO 


I~H  ^^  CO  ^O  CO 


M  a> 

II 


00  IO  CO  00  00 
t^lOT-Hr-l  CO 

01  <M  (M  OS^t^ 

oo^c^rc^rrt^oo" 

CO        (Ml> 


oo~ooio'co 

>OOt^(N 
T™H  "^  CO  ^O 


oo" 


fe 

O 

H 
O 

1 

5 


>>>»>» 

(M  i-H  1— I 

bCbCbChChCbCWJhCbCbC 


76 

In  calculating  the  composite  life  the  so-called  straight  line  method 
was  used.  This  method  gives  proper  weight  to  the  fact  that  the  short- 
lived apparatus  must  be  replaced  several  times  during  the  life  of  the 
property  having  a  longer  life,  so  that  the  composite  life  determined  in 
this  manner  will  provide  a  fund  sufficient  to  meet  the  replacements  as 
they  occur.  All  the  property  subject  to  depreciation  has  been  classified 
according  to  its  normal  life  in  service  and  the  cost  new  of  such  property 
for  each  classified  age  as  shown.  Since  the  salvage  value  can  be  secured 
from  the  property  after  its  usefulness  in  service  has  terminated,  this 
amount  must  be  deducted  from  the  cost  new  to  show  the  amount  which 
actually  depreciates  which  is  called -in  the  table  the  "wearing  value." 
The  number  of  times  each  class  of  property  will  be  renewed  during  the 
term  of  the  longest  life  contained  in  the  table  is  also  shown,  together 
with  the  total  expenditures  for  replacement  purposes  during  such  longest 
life  period.  Having  determined  the  total  requirement  during  the  entire 
period  for  each  class  of  property  it  is  necessary  to  multiply  this  amount 
in  each  case  by  the  number  of  years  during  which  each  dollar  is 
employed,  giving  the  amount  in  the  terms  of  "dollar  years."  By 
dividing  this  number  by  the  total  expenditure  during  this  period  of 
seventy-five  years,  there  is  shown  the  composite  life  of  the  property 
which  in  this  case  is  practically  thirty-five  years.  This  computation 
embraces  all  the  depreciable  property  devoted  to  the  manufacture,  dis- 
tribution and  sale  of  the  manufactured  gas,  together  with  the  proportion 
of  the  office  building  used  by  the  company  for  this  purpose.  On  the 
basis  of  the  above  life  of  thirty-five  years  and  the  assumption  that  an 
accumulation  for  depreciation  would  be  able  to  earn  4  per  cent  interest, 
it  would  be  necessary  to  set  aside  for  this  purpose  I1/-?  Per  cent  of  the 
total  depreciable  property  each  year.  While  this  amount  would  be  suffi- 
cient to  meet  the  replacements  as  they  normally  occur,  it  is  probable, 
due  to  the  uncertainties  of  a  business  which  extends  for  seventy-five 
years  into  the  future,  that  some  allowance  should  be  made  for  contin- 
gencies and  almost  certain  departures  from  conditions  upon  which  the 
table  is  based.  The  replacement  of  services  and  mains  will  doubtless 
cost  more  in  the  future,  due  to  the  improvements  in  the  streets,  and  the 
required  reconstruction  before  the  property  in  many  instances  has 
reached  the  point  of  complete  depreciation  will  mean  added  costs.  For 
this  reason  it  is  more  than  probable  that  some  equipment  will  be  aban- 
doned before  the  end  of  assumed  life  and  also  that  improvements  in  the 
process  of  manufacture  will  render  obsolete  some  of  the  property  now  in 
use.  Based  on  those  considerations  an  annual  allowance  of  2  per  cent 
on  the  depreciable  property  is  sufficient  to  cover  this  requirement. 
Applying  this  percentage  to  the  depreciable  property  in  1909  the  allow- 
ance for  depreciation  is  $642,487',  which  amount  is  considered  as  an 
operating  expense  and  included  in  the  adjusted  income  account. 


77 


RETURN    ON   INVESTMENT. 

Not  only  must  the  rate  to  be  charged  for  gas  be  placed  at  such  a 
figure  as  will  yield  sufficient  revenue  for  operating  expenses,  taxes  and 
depreciation,  but  it  must  provide  a  reasonable  allowance  as  a  return 
upon  the  investment.  A  rate  sufficient  to  meet  these  requirements  must 
be  provided  as  a  matter  of  law,  but  a  considerable  difference  of  opinion 
exists  as  to  what  may  be  said  to  constitute  a  reasonable  rate  of  return. 
Clearly  what  is  reasonable  in  one  industry  or  under  one  set  of  conditions 
will  not  necessarily  be  reasonable  in  all  cases.  Capital  flows  from  one 
field  of  industry  to  another  in  response  to  established  economic  laws. 
The  attractiveness  of  an  investment  may  be  temporarily  increased  or 
diminished  by  public  or  legislative  acts,  but  in  the  last  analysis  economic 
fundamentals  govern.  It  therefore  becomes  necessary  for  the  determina- 
tion of  this  rate  of  return  to  consult  a  wider  sphere  of  investment  than 
that  of  this  industry  alone  and  to  arrive  at  such  a  rate  from  the  con- 
sideration of  the  entire  investment  world  rather  than  from  an  abstract 
conclusion. 

At  the  outset  it  is  evident  that  the  rate  must  provide  at  least  that 
amount  of  return  which  is  equal  to  the  income  from  the  least  hazardous 
undertakings.  The  yield  from  bonds  and  mortgage  investments  are 
lower  than  the  return  from  manufacturing  and  commercial  investments 
because  of  the  diminished  risk  and  also  because  of  the  small  amount  of 
supervision  required  after  such  investment  has  been  satisfactorily  placed. 
The  risk  in  an  investment  may  be  due  to  several  causes,  chief  of  which 
are  the  unstable  nature  of  the  industry,  the  severity  of  competition  and 
the  fixedness  of  the  investment.  In  general  the  rate  of  return  demanded 
by  investors  varies  directly  with  the  risks  or  hazards  encountered  in  the 
business.  This  would  indicate  that  the  rate  to  be  allowed  on  an  invest- 
ment in  the  gas  industry  must  embrace  two  distinct  elements;  namely, 
that  rate  of  interest  to  which  a  creditor  is  entitled  as  determined  by  the 
general  cost  of  money  in  safe  investment  channels,  and  that  rate  of 
return  over  and  above  the  interest,  representing  in  a  certain  sense  the 
profit  of  the  partners  or  those  who  share  the  risks  of  the  industry.  That 
the  holder  of  a  single  certificate  may  stand  in  the  position  of  both  cred- 
itor and  partner  is  immaterial.  There  must  be  paid  to  capital,  irre- 
spective of  who  provides  it,  such  a  return  as  will  yield  a  fair  interest 
for  the  use  of  the  money  and  an  additional  allowance  determined  by  the 
risks  of  the  enterprise. 

The  interest  proportion  of  the  return  is  indicated  by  the  yield  of 
approved  mortgages  and  bonds.  Such  investments  without  burdens  of 
management  reasonably  yield  from  4%  and  5  per  cent  to  6  per  cent, 
depending  upon  a  variety  of  conditions.  The  rate  of  profit  to  be  allowed 
is  a  matter  of  judgment  based  upon  general  and  specific  conditions. 


78 

Among  these  may  be  mentioned  risks  inherent  in  the  business,  the  proba- 
bility of  inventions  rendering  a  part  of  the  plant  obsolete  and  greatly 
impairing  the  usefulness  of  the  company's  service,  the  degree  of  man- 
agerial skill  and  the  probable  future  of  the  enterprise.  As  affecting 
more  particularly  a  utility  investment,  reference  may  be  made  to  the 
likelihood  of  condemnation  for  the  purpose  of  public  purchase,  the  fre- 
quency of  public  rate  revision  with  its  accompanying  uncertainties  and 
the  danger  of  competing  utilities  in  a  city  where  the  investment  is 
already  sufficient  to  supply  the  entire  community.  These  conditions 
taken  together  tend  to  restrain  the  movement  of  capital  into  such  invest- 
ments, unless  the  rate  of  return  provides  some  compensation  for  the  risks 
assumed. 

In  favor  of  a  comparatively  low  rate  of  return  is  the  fact  that  the 
product  of  the  company  finds  a  ready  market  and  that  the  sales  are  far 
more  uniform  and  certain  than  in  commercial  undertakings.  This  is 
shown  by  the  stability  in  gross  earnings  of  utility  companies  during 
periods  of  business  depression.  While  manufacturing  companies  are 
often  compelled  to  close  their  establishments  for  a  time  or  to  greatly 
reduce  their  operating  forces,  utilities  in  general  show  practically  no  loss 
in  revenue  and  often  substantial  improvement.  The  Peoples  Gas  Light  & 
Coke  Company  is  also  especially  favored  through  the  ownership  of  a 
perpetual  franchise,  the  value  of  which  can  not  be  doubted.  These 
factors  serve  in  part  to  offset  certain  disadvantages  which  warrant  a 
somewhat  higher  rate  of  return.  When  all  the  factors  bearing  on  the 
subject  of  interest  and  profit  are  considered  together  with  respect  to  the 
investment  here  in  question,  it  must  be  concluded  that  7  per  cent  on  the 
fair  present  value  of  the  property  devoted  to  the  gas  business  is  a  reason- 
able and  proper  allowance. 


GAS  UTILITY  INCOME  ACCOUNT. 

The  foregoing  financial  data  have  been  combined  in  the  following 
income  account  for  the  gas  utility  alone,  showing  the  operating  revenues, 
the  operating  expenses,  net  earnings,  indirect  or  non-operating  utility 
revenues,  the  deductions  from  the  gross  corporate  income  and  the  surplus 
for  the  year : 

INCOME  ACCOUNT— GAS  UTILITY— 1909 

Per  M  Sold 
Operating  Revenue: 

Gas  Sales $13,663,168.01  .8496 

Tar  Sales 130,944.03  .0081 

Penalties 167,462.09  .0104 

Arc  Lamp  Rentals 340,873 . 31  . 0212 


Total  Operating  Revenue $14,302,447 . 44       . 8893 


79 


Operating  Expenses:  Per  M  Made 
Manufacturing — 

Steam  Material $  160,451.74                                       .0112 

Generator  Material 2,874,299. 24  . 2007 

Purifying  Material 11,541 . 61                                       . 0008 

Station  Supplies 30,279.35                                      .0021 

Manufacturing  Labor 341,832.68                                      .0239 

Works  Repairs 117,845.48                                     .0082 

Engr.  Dept.  General  Charges 45,897 . 73                                      . 0032 

Total 3,582,147.83       .2501 

Gas  Purchased  and  Allied  Expenses 748,157 . 06       . 2965 

Distribution—  Per  M  Sold 

Distribution  Station  Operation $  82,924.54                                     .0052 

Street  Mains  Maintenance 331,297 . 94                                      . 0206 

Service  Pipe  Maintenance 146,905 . 32                                      . 0091 

City  Lamp  Post  Maintenance 16,599 . 98                                      . 0010 

Meter  Maintenance 313,799.99                                     '.0195 

Gratuitous  Work 151,112.78                                     .0094 

Arc  Lamp  Maintenance 308,701 . 58                                      . 0192 

Total 1,351,342. 13       .0840 

Commercial  Expense — 

Promotion  Expense $  139,701.50                                      .0087 

Branch  Store  Expense 22,355.32                                      .0014 

Appliance  Expense 104,702.22                                      .0065 

Total 57,354.60       .0036 

Office  Expense: 

Turn  On  and  Off $  61,752.89                                     .0038 

Statement  Taking 96,918.76                                     .0060 

Bookkeeping 165,082.99                                     .0103 

Collecting 136,025.56                                     .0085 

Applications,  Receiving,  Auditing,  etc 236,637 . 63                                     . 0147 

Total 696,417.83       .0433 

General  Expense — 

General  Office  Expense $  379,834.55                                     .0237 

Telephone  Rentals 21,666.02                                     .0013 

Rent 156,219.79                                     .0097 

Legal  Expense 26,338.56                                     .0016 

Claims  and  Damages 54,000.00                                      .0034 

Employees'  Aid  and  Pensions  Fund  Allowance  133,372 . 00                                      . 0083 

Uncollectable  Bills 60,508.01                                     .0038 

Fire  and  Property  Damage •       42,000.00  .0026 

Main  Rentals 53,493.00                                     .0033 

Lease  Rentals 340,000.00                                      .0011 

Total 1,267,431.93       .0788 

Taxes 848,115.00       .0527 

Depreciation 642,487.00       .0399 

Sundry  Revenue  Requirements 153,941 . 00       . 0096 

Total  Operating  Expenses 9,347,394 . 38       . 5812 

Net  Earnings 4,955,053.06       .3081 


80 

Non-Operating  Utility  Revenue: 

Interest $  50,000 . 00  . 0031 

Rentals 17,591.06  .0011 

Miscellaneous 11,704.57  .0007 


Total  Non-Operating  Utility  Revenue 79,295 . 63  . 0049 

Gross  Corporate  Income 5,034,348. 69  . 3130 

Deductions  from  Gross  Corporate  Income: 

Return  on  Investment  at  7% 3,610,297 . 00  . 2245 


Surplus $1,424,051.69       .0885 

The  above  table,  after  deducting  the  operating  expenses  and  an 
amount  representing  the  return  on  the  investment,  shows  that  the  reve- 
nue produced  by  the  present  rate  of  85  cents  per  thousand  cubic  feet 
of  gas  is  equal  to  nearly  9.8  per  cent  on  the  fair  present  value  of  the 
property.  If  7  per  cent  represents  a  reasonable  return  for  the  investor 
there  remains  a  surplus  of  $1,424,051.69.  During  the  year  1909  the  com- 
pany put  into  the  distribution  system  a  total  of  16,845,175,000  cubic  feet 
of  gas,  of  which  14,323,047,000  cubic  feet  was  manufactured  water  gas 
and  2,523,110,000  cubic  feet  purchased  gas.  The  total  amount  sold  to 
customers  in  that  year  was  16,079,064,181  cubic  feet,  the  difference 
between  the  output  and  the  sales  being  gas  lost  and  unaccounted  for.  It 
will  be  seen  that  the  surplus  from  these  sales,  over  and  above  the  actual 
requirements,  is  equivalent  to  8.85  cents  per  thousand  cubic  feet  sold. 
Applying  this  surplus  to  a  reduction  in  rates,  the  data  indicates  that  the 
present  rate  may  be  reduced  by  8  cents  per  thousand  cubic  feet  to  a 
charge  of  77  cents.  Stating  such  a  rate  in  terms  of  gross  and  net  charges, 
the  investigation  leads  to  the  conclusion  that  a  reasonable  charge  for  gas 
under  present  conditions  would  be  77  cents  per  thousand  cubic  feet,  with 
a  penalty  of  10  cents  per  thousand  for  failure  to  pay  the  bill  rendered 
before  the  expiration  of  such  a  time  as  may  be  deemed  reasonable  through 
the  company's  rules  and  regulations.  Applying  a  rate  of  77  cents  per 
thousand  cubic  feet  to  the  total  sales  of  1909  instead  of  the  rate  actually 
in  force,  and  assuming  the  same  operating  charges  and  non-operating 
revenue,  there  remains  after  the  payment  of  a  return  to  the  investor 
amounting  to  seven  per  cent  on  the  present  value  of  the  investment,  a 
surplus  of  $141,753. 

In  considering  a  net  rate  of  77  cents  it  must  be  borne  in  mind  that 
The  Peoples  Gas  Light  &  Coke  Company  is  required  by  public  authority 
to  supply  gas  of  not  less  than  22  candle-power  and  a  calorific  value  of  not 
less  than  600  B.  T.  U.  Under  these  requirements,  the  company  in  1909 
supplied  gas  of  approximately  24  candle-power  and  an  average  calorific 
value  of  nearly  685  B.  T.  U.  Since  the  standard  called  for  in  most  cities 
is  considerably  less  it  will  be  seen  that  the  sum  of  77  cents  will  purchase 
in  the  city  of  Chicago  a  gas  of  far  superior  quality  to  that  generally  sup- 


81 

plied  in  American  cities,  and  the  same  sum  in  another  city  may  purchase 
more  than  1,000  cubic  feet  of  gas,  but  it  is  of  a  much  lower  quality  than 
that  furnished  in  this  city.  The  gas  at  present  supplied  in  Chicago  is 
reasonably  worth  from  3%  to  4  cents  per  thousand  cubic  feet  more  than 
that  furnished  in  other  cities,  especially  in  those  cities  where  the  present 
rates  appear  very  low.  Reduced  to  the  same  standards  of  quality,  the 
net  rate  of  77  cents  here  recommended  for  Chicago  is  equivalent  to  at 
least  as  low  as  73  cents  per  thousand  in  most  of  the  other  large  cities  in 
the  United  States. 

Further,  in  passing  upon  the  reasonableness  of  any  charge  for  gas, 
it  is  necessary  to  consider  the  service  furnished  as  well  as  the  rate  per 
thousand  cubic  feet.  It  is  a  matter  of  general  knowledge,  substantiated 
by  investigation,  that  the  service  furnished  by  The  Peoples  Gas  Light  and 
Coke  Company  is  uniformly  excellent.  Pursuant  to  city  ordinances, 
extensive  construction  work  has  been  carried  on  for  several  years,  seeking 
to  give  a  more  uniform  pressure  than  that  which  was  previously  supplied, 
and  with  the  completion  of  this  work  the  service  will  represent  the  best 
which  engineering  skill  under  present  conditions  can  provide.  This  serv- 
ice, it  may  safely  be  said,  is  the  equal  of  and  in  many  instances  superior 
to  the  service  supplied  in  other  cities.  It  is,  therefore,  of  paramount 
importance  that  the  reduced  rate  to  be  put  into  effect  shall  not  be  so  low 
as  to  necessitate  a  reduction  in  the  quality  of  service  now  furnished.  The 
problem  of  rates  is  broader  than  the  mere  question  of  charge  per  thou- 
sand cubic  feet.  Lighting  and  heating  standards  and  the  quality  of  the 
service  are  inseparably  connected  with  it. 

In  order  to  permit  of  a  comparison  of  the  above  recommended  rate 
with  the  charges  for  gas  in  leading  American  cities,  a  table  has  been  com- 
piled embracing  cities  in  excess  of  50,000  population  and  showing  the 
gross  and  net  rates  in  force.  The  data  contained  in  the  table  was  com- 
piled from  leading  gas  directories  and  information  concerning  rate  com- 
parisons prepared  by  companies  for  public  distribution.  Unfortunately, 
these  several  sources  of  information  frequently  differed  as  to  the  rate  in 
force  in  a  particular  city,  which  difference  was  doubtless  due  to  com- 
plicated rate  schedules  containing  provisions  for  discounts  varying  with 
the  amount  consumed  and  fixed  charges  in  the  form  of  customer  charges 
and  service  charges.  An  effort  was  made  to  secure  the  correct  rate  wher- 
ever the  several  compilations  differed,  and  while  a  number  of  corrections 
were  made,  it  is  possible  that  some  inaccuracy  still  exists  because  of 
changes  in  the  schedule  since  the  publication  of  the  source  of  information 
relied  upon  and  the  failure  of  the  companies  in  many  instances  to  make 
comprehensive  reports.  The  table  of  rates  follows : 


82 


PRICE  OF  GAS  IN  LEADING  CITIES  OF  OVER  50,000  POPULATION. 


City. 

State. 

Population 
Served. 

Per  M  Cubic  Feet. 

Gross. 

Net. 

Allentown  
Altoona  
Atlanta  
Baltimore  
Boston  

Pa 

52,000 
50,000 
150,000 
600,000 
625,000 
415,000 
1,589,250 
100,000 
50,000 
125,000 
215,000 
420,000 
100,000 
85,000 
140,000 
75,000 
550,000 
200,000 
115,000 
108,000 
80,000 
50,000 
105,000 
100,000 
239,500 
50,000 
50,000 
74,000 
95,000 
325,000 
175,000 
316,710 
370,000 
50,000 
2,410,000 
125,000 
350,000 
156,000 
1,600,000 
550,000 
250,000 
215,000 
97,000 
112,000 
190,000 
55,000 
90,000 
280,000 
90,000 
215,000 
750,000 
110,000 
80,000 
200,000 
330,000 
70,000 
60,000 
90,000 
138,000 

$1.10 
1.10 
1.00 
.85* 
.80 
1.00 
.80 
1.00 
1.10 
.85 
.70t 
.50* 
1.00 
.75 
.85 
1.00 
.75 
1.00 
.85 
.50* 
1.10 
.50* 
.75* 
1.15 
.60 
1.00 
1.00 
.90 
.90 
.80 
1.00 
1.00 
.60* 
1.15 
.80 
.95 
1.15 
1.00 
1.00 
.85 
.95 
.95 
1.10 
.90 
.95 
.95 
.70* 
1.00 
.90 
1.00 
.60* 
.80* 
.75* 
.70* 
.90 
1.10 
1.00 
.98 
.80 

Pa 

$1.20 
1.10 
1.10 

i]20 

"i'.io" 

1.20 
1.00 

Ga.. 

Md  
Mass  
N.  Y  

Buffalo  
Brooklyn  

N.  Y  

Bridgeport 

Conn 

Brockton  
Dayton 

Mass  
Ohio  
Colo  
Mich  
Iowa  
Minn  
Mass  
Tenn  
Ohio  

Denver  
Detroit  
Des  Moines  
Duluth  
Cambridge  
Chattanooga  

.80 
1.10 
.90 
1.10 
1.10 

Cleveland  

Columbus  
Fall  River  
Grand  Rapids  
Harrisburg  . 

Ohio  

1.10 
.95 
.90 

Mass  

Mich  

Pa 

Hamilton  
Hartford  
Houston  
Indianapolis  
Knoxville  
Lancaster  
Lawrence  
Lowell  

Ohio 

.80 
1.00 
1.25 

"i'.io" 

1.10 
1.00 
1.10 

Conn 

Tex  
Ind 

Tenn  . 

Pa  
Mass  
Mass  
Cal  
Tenn  
Minn 

Los  Angeles 

Memphis 

1.10 
1.20 
.90 
1.25 

i!6s 

1.40 
1.25 

"T.oo" 

1.00 
1.05 
1.20 

.05 
.15 
.40 
.25 
.00 
.20 
.80 
.35 
.00 
.10 
.10 

Minneapolis 

Milwaukee 

Wis 

Mobile  
New  York  
New  Haven  
New  Orleans.  ...... 
Omaha  
Philadelphia  
Pittsburg  
Portland  
Providence  
Reading  

Ala  

N.  Y  
Conn  
La     . 

Neb  
Pa  ..      . 

Pa  ..      . 

Ore.      ...      . 

R.  I  
Pa  
Va  
N.  Y  
Mich 

Richmond  

Rochester 

Saginaw.  . 

Salt  Lake  City  
Seattle  
Springfield  
St.  Paul  
St.  Louis  
Tacoma  
Terre  Haute  
Toledo 

Utah  
Wash 

Mass  
Minn  .  . 

Mo     .    . 

Wash  
Ind  
Ohio 

Washington  
Waterbury  
Wilkesbarre  

D.C  
Conn 

Pa 

1.10 
1.10 
1.20 

Wilmington  
Worcester  

Del. 

Mass  

tomer  charge. 


*Graduated  scale  of  rates  varying  with  consumption. 

fin  addition  to  the  rate  per  M,  the  company  exacts  a  demand  charge  and    cus 


83 


CONCLUSIONS. 


1910. 


Total  value  of  investment $61,849,879 

Total  value  of  physical  property 49,023,947 

Total  "going  value"  as  defined  in  the  report 9,425,932 

Gas  utility  investment  including  used  proportion  of  office 

building 


(Office  building  excluded  from  income  account  investment  and  rental 

charge  for  space  occupied  provided). 
No  allowance  made  for  value  of  franchises. 

No  allowance  made  for  the  cost  of  street  pavement  over  the  Company's 
distribution  system  not  paid  for  by  the  Company. 

Allowance  for  working  capital 

Allowance  for  depreciation 

Allowance  for  taxes 

Rate  of  return  allowed  on  the  investment 

Gross  operating  revenues 

Non-operating  revenues 

Present  actual  earnings  available  for  interest  and  dividends 

Allowance  for  return  on  present  value  of  utility  investment  at  7% 

Surplus  in  1909  after  allowance  for  interest  and  dividends 

Present  rate  for  gas 95  cents  per  M  gross — 85 

Rate  recommended 87  cents  per  M  gross — 77 

Saving  to  public  at  77  cents  per  M  on  1909  basis 

Probable  saving  in  five  years 

Earnings  available  for  interest  and  dividends  under  proposed  rate 

Surplus  under  proposed  rate  after  allowance  of  7%  for  return  on  investment. . 


1909. 

$58,060,210 
44,494,972 
10,365,238 

53,075,598 


$3,200,000 
642,487 
848,115 
7% 

14,302,447 
79,296 
5,034,349 
3,610,297 
1,424,052 
cents  per  M  net . 
cents  per  M  net . 
1,282,299 
7,400,000 
3,752,050 
141,753 


All  of  which  is  respectfully  submitted. 

WILLIAM  J.  HAGENAH, 
In  charge  of  Gas  Investigation. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 


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